5 more banks to face Prompt corrective action

Five public sector banks, including Canara and Union Bank of India, are in the process of being put under the Reserve Bank of India’s prompt corrective action (PCA) plan. According to rating agency ICRA, their net non-performing assets rose above 6 % in December 2017.

If the banking regulator places them under PCA, the action may drive these banks to recall additional tier-1 (AT-1) bonds, which is included in Tier-1 capital, of Rs 157 billion from investors.

Besides Canara and Union Bank, three other PSBs that may come under PCA are Andhra Bank, Punjab National Bank, and Punjab & Sind Bank.

While taking the decision on putting a bank under PCA, the RBI assesses its standing on three counts, namely capital adequacy ratio (CAR), net NPAs, and return on assets (RoA).

Banks become PCA candidates when they feel the minimum requirements of CAR or net NPAs rise above 6 per cent or the RoA is negative for two years. Breach of any one condition is seen as sufficient to trigger PCA.

Those banks under PCA regime face restrictions on expanding loan book, as the aim is to turn the bank around and improve financial and credit profiles.

With losses during the last three years, 11 out of 21 PSBs have been placed under the PCA framework by the RBI. Prominent amongst them are Bank of India, IDBI Bank, Central Bank of India, Dena Bank, and Corporation Bank.

The inclusion in PCA, coupled with recapitalisation of PSBs, by the government has triggered a ‘regulatory event’ and an early recall of AT-1 bonds by banks under PCA.