Home / Industry / Banking /  Shaktikanta Das revives hopes of RBI PCA framework review

Mumbai: Hopes of a relaxation in the prompt corrective action (PCA) norms for banks revived after the newly appointed Reserve Bank of India (RBI) governor, Shaktikanta Das, heard out a plea by the heads of seven public sector banks on only his second day in office.

Significantly, the meeting came just a day ahead of an RBI board meeting that is expected to discuss the road map for a subcommittee that will look into the demand for a review of the PCA framework. These norms were one of the key bones of contention between RBI led by Urjit Patel and union government. Eleven public sector banks are under RBI’s scrutiny for triggering the PCA framework. As a result, they face lending curbs, which, the union government argued during its ugly face-off with RBI, were squeezing liquidity and thereby impairing an economic recovery.

On Wednesday, Das signalled good optics at his first press conference. While reiterating that RBI autonomy would be preserved, Das said that he was keen to launch stakeholder conversations. Significantly, his first engagement was with public sector bank chiefs, who have been steadfastly lobbying for a review of the PCA framework.

In their first meeting with the new governor on Thursday, the public sector banks also sought easing of the 12 February circular on one-day default, two bankers told Mint.

Speaking on condition of anonymity, the first banker said that during the 90-minute meeting, the governor was trying to assess the challenges faced by state-owned banks. “The governor took time to listen to our issues and also sought our views on what could be done regarding those."

According to this banker, all four deputy governors were present as well, and the meeting was attended by the heads of IDBI Bank, Punjab National Bank, State Bank of India, Union Bank of India, Central Bank of India, Dena Bank and Bank of India.

“We sought easing of PCA norms, considering 11 of the 21 lenders are under the restricted lending framework," the second banker said, adding that the one-day default norm introduced by RBI was discussed in detail.

RBI had earlier asked banks to report defaults by borrowers with systemic exposure of 2,000 crore and above, even if the delay was by one day. The measure, deputy governor N.S. Vishwanathan later explained, was to bring bank loans on a par with default norms in the bond market.

The second banker said that while the governor listened to their problems, he did not indicate a follow-up meeting. Das, this banker said, also sought their opinion on the liquidity crisis among non-banking financial companies (NBFCs). “Representatives of private sector banks were not present at the meeting and maybe he will meet them separately."

The government and the central bank have joined issue over the relaxation of PCA norms, a special liquidity window for NBFCs, RBI’s 12 February circular on defaulters and transfer of the additional surplus held by it to the government. The issues are expected to be taken up when RBI’s central board meets on Friday.

Das, who assumed charge as the 25th governor of the central bank on 12 December, told reporters on Wednesday that he would meet the heads of Mumbai-based public sector banks to discuss the challenges facing the sector. “I would like to focus on banking sector immediately."

The RBI PCA framework was introduced in December 2002 as a structured mechanism, along the lines of the US Federal Deposit Insurance Corporation 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.

In a speech on 12 October, RBI deputy governor Viral Acharya defended the new PCA rules, calling them the required medicine to prevent further haemorrhaging of bank balance sheets. He added that PCA banks, in spite of their worse capitalization and stressed assets ratio than those of other banks, had credit growth that was as strong as that of other banks till 2014.

However, since the asset quality review exercise and imposition of PCA, the year-on-year growth in advances for PCA banks declined from over 10% in 2014 to below zero by 2016 and remained in the contraction zone since, Acharya had said. Under PCA, banks are mandated to cut lending to firms and focus on reducing concentration of loans to some sectors. They are restricted from opening branches and paying dividends.


Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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