Principal economic adviser Sanjeev Sanyal.
Principal economic adviser Sanjeev Sanyal.

Principal economic adviser Sanjeev Sanyal warns against ‘Hotel California’ approach on RBI PCA banks

There needs to be a plan for banks to come out of RBI's prompt corrective action (PCA) framework, says principal economic adviser Sanjeev Sanyal

Mumbai: India cannot take a “Hotel California" approach towards banks under the prompt corrective action (PCA) as their exit from the framework needs to be figured out, principal economic adviser said Sanjeev Sanyal said on Monday. “We cannot have a Hotel California approach to PCA banks that you can check out anytime but you cannot leave," said Sanyal, citing the lyrics of the famous 1970s song by American rock band Eagles.

“We have to have a plan on how these institutions come out of PCA," said Sanyal.

At present, 11 public sector banks and one private sector bank are under PCA. United Bank of India has been under these restrictions since 2014.

The Reserve Bank of India’s (RBI) prompt corrective action framework was introduced in December 2002 as a structured early intervention mechanism along the lines of the US Federal Deposit Insurance Corp.’s PCA framework. Subsequently, in 2017, the framework was reviewed based on the recommendations of the working group of the Financial Stability and Development Council on “Resolution Regimes for Financial Institutions in India" and the Financial Sector Legislative Reforms Commission.

On capital norms for commercial banks, Sanyal said Basel III norms are more than what is required by these banks.

“Even if we accept that Basel III is globally accepted, we feel Basel III is perhaps overdoing it," he said.

Referring to both of these—capital norms and Basel III norms—Sanyal said that these are related to ultimately making sure that credit flow reaches the bottom of the system.

“Because there is no point in having this highly capitalised central bank and highly capitalised banking system, none of which supports the financial requirements of the lower rung of economy," said Sanyal.

Under PCA, banks are mandated to cut lending to corporates and focus on reducing concentration of loans to certain sectors. They are also restricted from opening new branches and paying dividends.

Amid the demand from the government and lenders for relaxing PCA, the RBI has made its stand clear: In a recent speech, deputy governor Viral Acharya called it the required medicine to prevent further haemorrhaging of bank balance sheets.

The statement comes at a time when small businesses facing liquidity crunch are seeking cheaper funds. Mint reported on Monday that micro, small and medium enterprises (MSMEs) say that the government and the RBI should do more so that they have easy access to funds, given that anaemic banks have been placed under lending restrictions and non-banking financial companies are facing a liquidity crunch.

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