BackIDBI Bank’s exit from PCA sparks hope for three banks
The three banks under PCA —public sector lenders Indian Overseas Bank (IOB), UCO Bank and Central Bank of India —have reported net non-performing assets (NPAs) below levels that trigger PCA
PremiumMUMBAI : IDBI Bank Ltd’s exit from central bank purgatory has raised hopes that the remaining three banks under prompt corrective action (PCA) could be next in line for similar relief, having achieved parameters to justify their exit.
The three banks under PCA —public sector lenders Indian Overseas Bank (IOB), UCO Bank and Central Bank of India —have reported net non-performing assets (NPAs) below levels that trigger PCA. The corrective action norms are used to rein in banks that have breached certain regulatory thresholds in bad loans, capital adequacy and profitability. While IOB was placed under PCA in 2015, the other two joined two years later.
Since then, net NPA ratios of all three have improved after setting aside substantial provisions to cover bad loans. However, there is a catch. If proforma net NPAs are taken into account, Central Bank of India, at 6.58%, does not qualify for an exit since 6% is the threshold set by RBI. Proforma bad loans show the percentage of assets that would have been classified as NPA if not for a 3 September Supreme Court order that temporarily halted such classification. While IOB qualifies on the net NPA front even on a proforma basis, Kolkata-based UCO Bank has not disclosed the number in the notes to its fiscal third-quarter financial results.
“Based on the proforma net NPA numbers and other PCA parameters, IOB seems to be the likeliest to exit PCA," said Anil Gupta, who heads financial sector ratings at Icra Ltd.
Emails sent to the three banks under PCA remained unanswered.
However, even if RBI decides to lift curbs, it could still keep them under constant monitoring to avoid a further rise in slippages, as seen with IDBI. IDBI, RBI said, has provided a written commitment that it would comply with the norms of minimum regulatory capital, net NPA and leverage ratio on an ongoing basis. “It has been decided that IDBI Bank be taken out of PCA framework, subject to certain conditions and continuous monitoring," RBI said in a note on 10 March.
Meanwhile, the fact that the Centre is planning to privatize two public sector banks, apart from IDBI Bank, could augur well for the three banks. Experts said the PCA curbs could affect the valuations of a bank undergoing divestment. To be sure, IDBI Bank is already classified as a private lender after the Life Insurance Corp. of India took a 51% stake in it in January 2019.
Financial services secretary Debasish Panda was cited by PTI as saying on 2 February: “These three banks are also consistently for the last two quarters... in profit and are fulfilling, by and large, all the parameters of RBI. We hope that before the close of this fiscal (they should be out of PCA)."
Then, there is the criterion of capital adequacy. Any capital infusion by the Centre will help them exit PCA and pave way for privatization. “On capital adequacy, capital raised by larger public banks provides headroom for Centre to allocate capital for PCA banks in FY21. As some large public banks have raised equity capital, the Centre might infuse capital (from budgeted pool) into PCA banks in FY21 and FY22, if required," said Gupta.
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