Mumbai: Not only was the union finance ministry aware of changes to the Reserve Bank of India’s (RBI’s) prompt corrective action (PCA) rules, it had accepted them as well, show communications between the government and the central bank. In a letter dated 3 March 2017, more than a month before RBI put the new rules in place, the finance ministry’s department of financial services (DFS) conveyed its acceptance and approval of the revised PCA framework.
Mint has seen a copy of the letter.
Referring to an earlier RBI communication dated 16 September 2016, DFS had said that they “broadly agree with the provisions of the revised prompt corrective action (PCA)".
The ministry suggested some safeguards as well. In the same letter, the government said if the central bank observes that a bank’s Common Equity Tier 1 (CET1) ratio falls owing to a sudden spurt in provisioning, the new PCA guidelines should be able to take that into account.
CET1 is a key performance metric, breaching of which leads to restrictions under PCA. Others include asset quality and return on assets.
A person aware of these exchanges between the regulator and the government said RBI made the change suggested by the ministry before notifying it on 13 April 2017.
There have been recent media reports that RBI did not consult the government on PCA guidelines. Mint reported on 31 October that though PCA had become a source of discord between RBI and the government, it was framed after extensive consultations.
An email sent to an RBI spokesperson seeking comments was unanswered at the time of publishing this story.
The RBI PCA 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.
In a speech on 12 October, RBI deputy governor Viral Acharya defended the new PCA rules, calling it the required medicine to prevent further haemorrhaging of bank balance sheets. He had added that in spite of their worse capitalization and stressed assets ratio compared to other banks, PCA banks had credit growth that was as strong as that of other banks up until 2014. However, since the asset quality review exercise and the imposition of PCA, the year-on-year growth in advances for PCA banks has declined from over 10% in 2014 to below zero by 2016 and remained in the contraction zone since, he had added.
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. Currently, 11 public sector banks and one private sector bank are under PCA.
The ministry and the central bank are at loggerheads over a clutch of issues including relaxation of PCA norms, special liquidity window for non-banking financial companies, RBI’s 12 February circular on defaulters and transfer of more of RBI’s surplus to the government. While the war of words between the government and RBI is on for over two weeks now, a meeting of RBI’s central board on 19 November is expected to be stormy, with government nominees expected to take up these issues.
On 9 November, Subhash Chandra Garg, secretary of the department of economic affairs, had tweeted that discussions are underway with RBI to decide the appropriate economic capital framework of the central bank.