RBI: New Reserve Bank moratorium: Unshackling Banks government is preparing to privatize banks

The Reserve Bank of India (RBI) published on November 2 the revised Framework for Immediate Corrective Action (PCA) for all scheduled banks in India. The new framework revises the PCA rules announced in 2017 considering changes in the banking environment over the last four years. The new rules will take effect from January 1, 2022. If the financial situation of a bank appears to be deteriorating and falling below the standards set by the central bank, then it is within the framework of the ACC through which the Reserve Bank takes the appropriate intervention and reform measures. Under the PCA framework, it evaluates commercial banks and places restrictions on them in terms of loans. In actions related to governance, the lead bank may replace the bank’s board of directors under Section 36ACA of the Banking Regulation Act of 1949.

According to the latest guidelines, the health of banks will be evaluated based on three main parameters: capital, asset quality and status. Under each parameter, the Reserve Bank has prescribed three types of risk limits, on the basis of which the impaired condition of banks will be measured according to the standards. Under the criterion of ‘capital’, the Reserve Bank has suggested minimum regulatory measures in terms of CRAR (ratio of capital to risk assets).

CRAR is also called the Capital Adequacy Ratio and is a measure of the capital available with the bank as a percentage of the bank’s credit risks, that is, the potential loss to the bank in the event of default by the borrower. The net non-performing assets ratio will be examined under “Asset Quality”. Under “Status”, the relationship between the status to assess the health of the bank will be evaluated. This ratio gives the financial position of the bank in terms of the bank’s debt and its capital or assets.

Two important differences from the previous guidelines are that payment banks and small financial banks have been removed from the list and the profitability or profitability clause of the bank’s assets has been removed. Previously, the profitability or profitability of banks was strictly monitored. In the event of negative ROA for two consecutive years, the bank was placed under the PCA.

Madan Sabnavis, Chief Economist at Care Ratings Ltd., says: “By reforming the PCA rules, the Reserve Bank has tried to make the above conditions less stringent, so that loans are not affected.” It also adds. It is said that the Reserve Bank will eventually have to encourage lending in the banking system. However, the exclusion of a bank from the PCA framework still depends on the ease of supervision by the Reserve Bank and the bank’s ability to maintain profitability.

Industry watchers also feel that the loosening of rules is a sign that the government is preparing to privatize the banking sector. He says that if the government had to attract potential buyers for public sector banks, the strict profitability rules could have been daunting. In 2017, the RBI also revised the PCA framework in a similar way, taking into account the asset quality review carried out two years earlier to clean up banks’ balance sheets.

At present, the Reserve Bank has placed only one bank under the ACP. That is the Central Bank of the Public Sector of India. It was placed under the ACC in June 2017 due to negative asset returns and a large proportion of bad loans. With the implementation of the new guidelines, it is expected that this bank will also enter the revised PCA framework. According to media reports, in September, the Central Bank of India’s capital adequacy ratio had improved to 15.38 percent from 12.34 percent a year ago. In March of this year, the Reserve Bank removed IDBI from the PCA framework. Subsequently, in September, Indian Overseas Bank and UCO Bank also pulled out of this framework after improving performance.


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