One of the main issues of contention between the government and the Reserve Bank of India (RBI) is the prompt corrective action (PCA) framework for banks. Now, it pays to see how the banks that have come under PCA have performed.

Bank of India is the fifth lender among the 11 under PCA to report September quarter results, and the signs are mixed. The public sector bank reported a quarterly loss of 1,156.25 crore, massive if one compares with the Bloomberg analysts’ survey, which estimated losses of 456.30 crore.

The bank had to provide 71% more than it did a year ago, and its core income stagnated owing to the focus on conserving capital instead of lending. The stock of bad loans remained above 60,000 crore and the bad loan ratio barely improved, despite the rather encouraging 10% growth in its domestic loan book.

Bank of India was put under PCA in December 2017, and the performance of its peers shows that the lender has to expect copious bleeding in the first few quarters. After all, the focus under PCA is to heal the balance sheet by removing toxic assets, building insurance on future risks and keeping off risky assets.

The lender has indeed begun ramping up provisions every quarter. Its provision coverage ratio has reached 69% in September from 56% when it entered PCA.

Consequently, Bank of India’s net non-performing assets (NPAs) have come down to 7.64% of its loan book from 10.29%. Its provision coverage ratio for loans under insolvency proceedings is 85%. Slippages are a fraction of what they were in the last two quarters.

But this is where the good part ends.

Bank of India has to provide for mark-to-market hit on its bond portfolio over the next two quarters. It has an exposure of over 10% of its loan book to decaying power producers. The bad loan ratio of its retail assets is a little above 4%, one of the highest among banks.

The lender’s capital adequacy ratio is hardly improving. In fact, the total capital as a percentage of risk-weighted assets is down sharply from the year-ago period. A part of this can be attributed to the bank’s increased provisioning amid shrinking income.

RBI monitors banks under PCA on their net NPAs, capital adequacy ratio, return on assets and leverage ratio. Most lenders, which came under PCA, had alarming net NPA levels, and breached the regulatory minimum on capital. Unless most of these parameters show a marked improvement, the central bank is unlikely to temper down its rules.

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