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20
April 2017
 |
R.B.I (The Total Investment & Insurance
Solutions)
The
Reserve Bank of India's (RBI) updated "prompt corrective action"
(PCA) framework could suggest a greater willingness to take regulatory action to
address problems at struggling banks. However, according to a ratings agency,
its implementation is only likely to be effective if it is matched by credible
plans to address banks' significant asset quality issues and capital shortages.
In
a report, Fitch Ratings, says, "The RBI primarily limited itself to
restricting bank lending under the previous PCA framework. The scope for
possible regulatory actions has been broadened under the amended framework, but
it remains uncertain to what extent the RBI will use the tools it has just made
available." The Total Investment
& Insurance Solutions
"Moreover,
the RBI will not be able to address problems in the banking sector on its own.
Significant efforts to resolve bad loans, for example, would leave banks in
need of recapitalisation, given that haircuts and increased provisions would be
required. State banks are generally in a poor position to raise new capital,
which makes them largely reliant on the government for recapitalisation,"
the ratings agency added.
The
RBI has tightened the thresholds - for capital ratios, non-performing loans
(NPLs), profitability and leverage - at which banks enter the PCA framework.
Fitch says, this appears to be an acknowledgement of the significant asset
quality stress in the system and that more banks are in need of regulatory
intervention.
PCA
was previously viewed as an extraordinary step, which the RBI urged banks to
make great efforts to avoid. That now looks likely to change. More than half of
state-owned banks would breach at least one of the new thresholds, mainly owing
to high NPLs, based on their latest financial reports. The new PCA framework
will be invoked on the basis of the banks' FY17 financials, which they are
still reporting.
The
RBI has also given itself greater discretion in terms of the measures it can
use to intervene in banks once they fall under the PCA framework, which
suggests it has recognised a need to take corrective action at an earlier stage
when banks run into difficulties.
The
previous PCA, in contrast, explicitly reserved the most interventionist actions
for banks that had breached more extreme thresholds. It is possible that
intervention could involve forcing banks to conserve capital, if other actions
do not address problems. The risk of non-performance on bank capital
instruments may therefore have risen.
According
to Fitch Ratings, the actual impact of the new PCA rules will depend on how the
RBI uses them. "Two circulars released on Tuesday, which pressure banks to
make provisions above the regulatory minimum and require further disclosures on
NPLs, point to the RBI's seriousness. These circulars might weigh on bank
earnings in the next round of reports. Should the additional disclosures reveal
weaknesses that are greater than expected there could be further pressure on
the banks' Viability Ratings," it added. The Total Investment & Insurance Solutions
The
ratings agency feels that RBI may use the PCA framework to identify weak banks
as candidates for mergers. It says, "State Bank of India (SBI) took over
five smaller lenders earlier this month, and further consolidation could be
part of the overall strategy to clean up the banking system. However, mergers
would also require the support of the government."The Total Investment & Insurance Solutions
