Home >Markets >Mark To Market >Does relaxation in RBI PCA framework mean more banks exit quarantine?

Capital infused? Check. Dud loans written off? Check. Bad loan ratios improving? Check. Positive return on assets (ROA)? No need.

The removal of one threshold by the regulator has made it easy for three public sector banks to come out of the prompt corrective action (PCA) list. Bank of India, Bank of Maharashtra and Oriental Bank of Commerce exited the RBI PCA framework last month, after the Reserve Bank of India (RBI) did away with the requirement for banks to have a positive ROA in the preceding two years to avoid PCA.

Removing return on capital as a threshold has helped three banks exit the RBI PCA framework but for the others, the exit is still trecherous.
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Removing return on capital as a threshold has helped three banks exit the RBI PCA framework but for the others, the exit is still trecherous. (Naveen Kumar Saini/Mint)

RBI made an about-turn on the ROA requirement saying, “the same (ROA) is reflected in the capital adequacy indicator". It added that “these banks have provided a written commitment that they would comply with the norms of minimum regulatory capital, net NPA (non-performing assets) and leverage ratio on an ongoing basis...."

Undoubtedly, the capital infusion by the government in these banks had a large role to play as well.

Capital adequacy ratios for the three banks have improved in a big way after the fund infusion. Bank of India received the highest amount of over 10,000 crore. The increase in capital facilitated large write-offs, bringing down its net NPA ratio to acceptable levels.

But if you think non-consideration of negative ROA will help the remaining banks to saunter out of PCA, you are wrong. The only lender that would easily move out is Dena Bank by way of a merger in April.

For the remaining seven, it is really a toss-up. That’s because, at the end of the day, the banks that the government favours and grants ample capital will be the ones that can make adequate provisions and meet regulatory requirements of low net NPA ratios and minimum capital ratios.

Rakesh Kumar, an analyst at Elara Capital, said: “Allahabad Bank, Corporation Bank and Central Bank (in order of preference) have highest probability of getting out of the PCA scheme, provided these banks get additional equity capital infusion."

Allahabad Bank has the lowest net NPA ratio and a decent capital adequacy ratio. Corporation Bank has an enviable Common Equity Tier 1 ratio of 9%, but bringing down 11% of its net NPAs to the required 6%, would risk burning down the entire capital in excess of the regulatory minimum. It would get the bank out of the PCA framework, but its balance sheet would be emaciated.

Therefore, it all boils down to the amount of capital the government is willing to infuse in these banks. IDBI Bank Ltd’s management had recently said that it was hopeful of exiting PCA by September. However, it has the biggest net NPA ratio of 14% and the nearly 10% common equity capital will not be enough to burn. Perhaps, IDBI Bank, too, is banking on the largesse lenders such as Bank of India has enjoyed.

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