RBI tightens rules for regulatory action on banks
Reserve Bank of India (RBI) has tightened the rules that trigger regulatory action on banks when they fall short of capital or exceed bad loan limits
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Mumbai: The Reserve Bank of India (RBI) has tightened the rules that trigger regulatory action on lenders when they fall short of capital or exceed bad loan limits. Under the revised rules, as many as 16 banks could face RBI intervention if their December quarter numbers are considered.
According to RBI’s so-called prompt corrective action (PCA) framework, banks are assessed on three parameters: capital ratios, asset quality and profitability. Failure to meet any of these norms could invite RBI action on these lenders, which could include strictures on lending and branch expansion, change in management and reduction in assets.
These norms come at a time when the bank s are struggling with Rs7 trillion in toxic loans and many banks are starved for capital.
Under the revisions announced on Thursday, the first risk threshold under PCA would be triggered if the capital-to-risk assets ratio falls below the minimum mandated 10.25%. The original rules introduced in 2002 had set this limit at 9%. Breaching this threshold would mean restrictions on dividend distribution or remittance or profits; promoters would also be asked for capital infusion, said RBI.
RBI has also defined two more risk thresholds—when the capital adequacy ratio falls below 7.75% and below 6.25%. Each higher threshold brings more strictures such as stopping branch expansion, higher provisions and even restrictions on management compensation and directors’ fees.
Apart from these mandatory actions, RBI has armed itself with discretionary powers such as winding up the bank or merging it, which it would use when the highest risk threshold is breached.
As of December, Dhanlaxmi Bank and Central Bank of India were the only ones to have a capital adequacy ratio of less than 10%. These rules are applicable based on 31 March 2017 numbers.
“The PCA framework is nothing new. In the backdrop of Basel (capital adequacy) norms incrementally going to be tighter, RBI is using this tool to finally intervene in the banks. This tool will assist in guiding banks to faster NPA (non-performing asset) resolution which, if left to their own, is only going to get delayed,” said Saswata Guha, director, Fitch Ratings.
On asset quality, RBI has mandated a maximum net NPA ratio of 6%. A net bad loan ratio of more than 12% is the highest limit and breaching it could result in RBI asking lenders to sell assets, cut unsecured exposures and so on. Under the old rules, net NPA had to breach 10% for RBI action to kick in.
There were 16 commercial banks which had a net NPA ratio of more than 6% at the end of December. Indian Overseas Bank—where RBI had previously initiated action under PCA in October 2015—had the maximum net NPA ratio of 14.32%. For Bank of Maharashtra and United Bank of India, it is in excess of 10%.
RBI will also monitor leverage as an additional parameter under the framework.