Dena Bank will be the first lender to exit the prompt corrective action (PCA) framework, the Reserve Bank of India’s (RBI) intensive care unit. But this exit is through death, as the lender would cease to exist as an entity after April, when its merger with Bank of Baroda takes effect.
It is hard to say when the remaining 10 lenders still quarantined under RBI PCA framework would come out. But the recent commitment of the government to infuse capital seems to suggest that the distance to the door just got reduced. At least, the investors holding the scrips of these lenders seem to think so, as six of them have surged more than 10% in the last three weeks.
The optimism comes on reports that the government will soon infuse about ₹ 27,000 crore into six PCA banks. It is also willing to pour in ₹ 41,000 crore over and above the original commitment of ₹ 65,000 crore into 21 public sector banks as part of the bank recapitalisation plan.
What investors are betting on is that the government will be the parent who gives the maximum attention to the weakest child. Hence, the RBI PCA banks would receive the biggest chunk of funds. Indeed, in the previous round of infusion in fiscal year 2018, the government did exactly that. The fact that Bank of India received a whopping ₹ 10,086 crore infusion last month shows how serious the government is in putting life back into the lenders. According to analysts at Kotak Institutional Equities, the lender needed ₹ 4,100 crore additional capital in 2019-20 to offset provision requirements.
As of September, Bank of India’s common equity Tier-I ratio was 7.5%, far higher than the regulatory minimum of 5.5% and the additional capital infusion will boost this further. Given the increased elbow room in capital, the lender can write off loans to bring down its net bad loan ratio below the required threshold and exit PCA.
Analysts at Kotak believe that Bank of India, Oriental Bank of Commerce and Corporation Bank now have a strong chance to exit PCA. Bank of India has the lowest net bad loan ratio among PCA banks and also has a stronger capital adequacy ratio.
A bank is dragged into PCA if it breaches thresholds for capital, bad loans, leverage ratio and return on assets. The Reserve Bank of India (RBI) looks into the performance of the lenders on an annual basis to determine whether they are strong enough for it to remove restrictions imposed on them under PCA.
The government’s capital infusion seeks to mend the capital ratios of weak banks under PCA and also help them make provisions to bring down the net bad loan ratio to below 6%. In a nutshell, fresh money should enable banks to get the numbers to exit PCA. Of course, some relaxation of norms may still be required from the central bank, on parameters such as return on assets, since most state-owned lenders have been running losses.
To be fair, some banks have shown marked improvement in strengthening their balance sheet, but most others continue to lag.
The government’s principal economic adviser Sanjeev Sanyal had chided RBI to have a Hotel California approach to PCA. To borrow the reference to the 1970s song of that title by American rock band Eagles, the queue to check out of the hotel is slowly forming.