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  3. RBI's revised PCA framework positive for banking sector: ICRA

RBI's revised PCA framework positive for banking sector: ICRA

20 Apr 2017 Evaluate

Welcoming the Reserve Bank’s recent revision in the prompt corrective action (PCA) framework for the banks, domestic credit rating agency ICRA has said that it is positive for banking sector, given the operating and financial profile of some of the banks and it expects that these measures will strengthen the banking system over the medium term and allow the stronger and well managed banks to grow, noting that it will put the onus of improving the systems and procedures on weaker banks and their promoters/management.

In its latest report, ICRA said that the increasing levels of gross non-performing assets (NPAs) has adversely impacted the profitability, capitalisation and solvency levels of Indian banks, especially during the last two years, i.e. FY2016 and FY2017and it anticipates a further weakening in asset quality during FY2018 and consequently pressure on internal capital generation and increasing capital requirements under the Basel III capital adequacy framework. Besides, it noted that the capital requirement, especially for public sector banks (PSBs) is extremely large.

The RBI has brought down the net NPA levels required to include the bank under PCA framework to a level of 6 per cent now as against 10 per cent earlier, which will make mandatory for the banks to increase the provision coverage on the NPAs for remaining outside the PCA framework. ICRA pointed that the revision in PCA has increased the required overall capital levels and has also introduced the minimum core equity (CET) capital levels required to be maintained by the bank so as to avoid its inclusion under the PCA.

ICRA estimated that based on the revised PCA framework, a total of 16 PSBs out of 21 (excluding SBI associates) and two out of 16 private banks will require taking mandatory corrective actions such as raising capital levels, restricting the dividend payments, branch expansions or face restrictions on management compensation to come out of the PCA framework.

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