Eleven state-run banks under the Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework recorded higher interest income but lower asset quality, a Mint analysis showed, even as differences between the government and central bank over the framework have burst out into the open.
According to Capitaline data, the 11 banks saw net interest incomes (NII)—the difference between interest earned and expended—rise as much as high as 114% on a year-on-year (y-o-y) basis. However, the free fall in asset quality continued, as gross bad loan ratios rose 195-667 basis points (bps).
RBI imposed PCA norms on these banks between February 2014 and January 2018. Since most of the banks came under these restrictions in May 2017, we have used data between the June quarter of FY18 to the June quarter of FY19 for tracking their performance.
For instance, Corporation Bank saw a 51% y-o-y increase in NII in Q1 FY19 but its gross non-performing assets ratio – gross bad loans as a percentage of gross advances—rose 195 bps in the same period.
Meanwhile, IDBI Bank, which is being acquired by Life Insurance Corp. of India (LIC), saw its improving NII overshadowed by worsening asset quality.
While the bank’s net interest income rose 17% y-o-y in Q1 FY19, its gross NPA ratio worsened by 667 bps. Close to a third of IDBI Bank’s loans have now turned sour.
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.
Amid the demand for relaxing PCA from the government and lenders, RBI has made its stand clear: In a recent speech, deputy governor Viral Acharya called it the required medicine to prevent further haemorrhaging of bank balance sheets.
While these banks remain under the restricted-lending state, they have still been able to garner healthy interest income in the last one year, owing to the decline in deposit rates coupled with their ability to cut bulk deposits. For instance, UCO Bank earned 1% y-o-y lower interest in the June quarter of FY19 and paid 14% y-o-y lower interest to its depositors.
“In spite of their worse capitalisation 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 (AQR) 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,” said Acharya.
Said Karthik Srinivasan, group head, financial sector ratings, Icra: “It is necessary to take corrective action when banks are under duress and PCA guidelines are to help them get back in good health. However, as these banks are also currently faced with a challenging operating environment, they will take a little longer than expected to get back into shape.”
Experts say PCA guidelines are better left undiluted and should be seen as a measure to resuscitate critically weak banks.
The Economic Times reported on 26 October that RBI has rejected the government’s proposal to ease the PCA norms for banks at its board meeting.
The PCA framework was introduced in December 2002 as a structured early intervention mechanism along the lines of the Federal Deposit Insurance Corp.’s (FDIC) PCA framework.
Subsequently, the framework was reviewed based on the recommendations of the working group of the Financial Stability and Development Council (FSDC) on Resolution Regimes for Financial Institutions in India and the Financial Sector Legislative Reforms Commission (FSLRC). The revised PCA Framework was issued on 13 April 2017 and was implemented as on 31 March 2017. – Neal Bhai Reports (NBR)
