The mounting non-performing assets with public sector banks see no end and have instead become a curse for the banking industry. So, to put it under check and invigorate the banking industry, government recently announced their recapitalization through recapitalization bonds and fund raising option.
Other than this as a recent measure, RBI invoked prompt corrective action or PCA on 10 banks. So, what is PCA and which are the banks on which action has been taken is discussed here forth.
What is PCA or Prompt-Corrective Action Taken By RBI On Banks?
Within the framework of prompt-corrective action, three threshold levels for risk are defined, one being least risky and three carries the highest risk. And, in case the bank falters on any of the critical parameters including capital, asset quality and profitability, attempt is made to take corrective action at a preliminary stage. This is done to strengthen the bank and also safeguard interest of bank customers.
Capital adequacy requirement
Basel III norms require banks to comply with minimum capital adequacy ratio or CRAR on a combined basis of 10.25%.
The banks with CRAR of more than 7.75% but less than 10.25% are put in the risk threshold of one. While those with CRAR of less than 7.75% but more than 6.25% are categorized in the second threshold and in case the capital falls below 3.625% the bank falls in the highest risk category.
Asset quality or NPAs
This is another criteria based on which the bank's financial health is judged. So, depending on the level of bad loans or net NPAs, banks can be placed in any of the three risk threshold categories.
Return on assets is the third ground based on which performance of the bank is assessed. And in case the bank generates negative return on assets for continuous two, three or four years then it is put in one, two and three threshold respectively.
Banks on which prompt corrective action has been taken by RBI
In case of Bank of India (BoI), RBI in addition to NPA and profitability woes has put a scanner due to insufficient capital. For other banks, the action has been taken primarily due to negative returns and high NPAs. The list of these banks includes Bank of Maharashtra, Central Bank of India, Corporation Bank, Dena Bank, IDBI Bank, Indian Overseas Bank, Oriental Bank of Commerce, UCO Bank and United Bank of India.
Is PCA on banks a cause of concern for bank depositors?
No, not exactly, bank depositors need not worry as this is only a proactive measure and involves identifying risk at a very early stage for taking necessary corrective action. And as may be perceived by bank customers, neither their deposits shall be seized nor the banking entity would go bankrupt.
The normal banking operations of the bank are also not hit or limited if the bank is put under corrective action. However, based on the risk threshold bracket, few of the restrictions in respect of bank expansion, management compensation or dividend distribution could be placed on banks by the apex bank.