Mumbai: Reserve Bank of India (RBI) deputy governor Viral Acharya on Friday said that any relaxation of the prompt corrective action (PCA) imposed on weak banks should be avoided.
Without the PCA imposition, some banks would have incurred even higher losses and required even more of taxpayer money for recapitalisation, Acharya said at his alma mater, the Indian Institute of Technology, Bombay.
“Imposition of PCA can thus be seen as first, stabilizing the banks at risk, and then, undertaking the deeper bank reforms needed for long-term viability of the business model of these banks," he said.
Banks sought relaxation of the PCA framework during the annual review meeting with the finance minister last month. On 26 September, The Economic Times reported that the government is likely to seek relaxation in PCA framework, which bars loss-making banks from lending.
Acharya defended the argument that imposition of PCA has led to a slowdown in credit. Instead, he said the nominal non-food credit growth of banks has been close to or above double-digit levels for the past several quarters.
“The reduction in lending at PCA banks is being more than offset by credit growth at healthier banks. This is indeed what one wants—efficient reallocation of credit for the real economy with a financially stable distribution of risks across bank balance-sheets," he said.
Acharya also said that the call for more lending by PCA banks to large industries comes at a time when these banks are de-risking the asset side of their balance sheets by moving away from riskier sector loans to less riskier ones and government securities.
“The first and foremost priority is to limit losses at PCA banks and prevent further erosion of their capital," he added.
In April, RBI tightened the rules under its “PCA Framework", which aims to rein in lenders when they fall short of capital or exceed bad loan limits.
Under this framework, banks are assessed on three parameters: capital ratios, asset quality and profitability. Failure to meet any of these could invite RBI action, including strictures on lending and branch expansion, change in management and reduction in assets.
The 11 banks that are under PCA are Dena Bank, Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce and Bank of Maharashtra.