PSU Banks may come out of Prompt Corrective Action

The finance ministry is hopeful that 3-4 banks will come out of the RBI’s Prompt Corrective Action (PCA) watchlist this year, following the expected modification of guidelines and apparent improvement in bottomline of the public sector banks, sources said.

Of the 21 state-owned banks, 11 are under the PCA framework, which imposes lending and other restrictions on weak lenders.

Recently, the RBI in its central board meeting decided the issue of banks under PCA will be examined by a board for financial supervision (BFS) of the central bank.

The PCA framework kicks in when banks breach any of the three key regulatory trigger points — namely capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA).

Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio and the government and some of the independent directors of the RBI board, like S. Gurumurthy, are in favour of this practice adopted for the domestic banking sector. However, the RBI has strongly defended the PCA framework in the past.

Last month, its deputy governor Viral Acharya had said that any relaxation in the PCA imposed on weak banks should be avoided. “Imposition of PCA can be seen as stabilising the banks and then undertaking the deeper reforms needed for long-term viability of the business model of these banks,” he had said.