In a significant move, the RBI on January 31 lifted lending curbs on three out of 11 weak public sector banks (PSBs) as the central bank under new Governor Shaktikanta Das met one of the key demands of the government for boosting credit growth.
Bank of India (BoI), Bank of Maharashtra (BoM) and Oriental Bank of Commerce (OBC) are now out of the Prompt Corrective Action (PCA) Framework, a move that will help expand loan growth to prop up economy.
"It has been decided that BoI and BoM which meet the regulatory norms including Capital Conservation Buffer (CCB) and have Net NPAs (non-performing assets) of less than 6 per cent as per third quarter results, are taken out of the PCA framework subject to certain conditions and continuous monitoring," the RBI said in a statement.
In case of OBC, the net NPA has come down to less than 6 per cent as the government has infused sufficient capital, it said.
Hence, it has been decided to remove the restrictions placed on OBC under PCA framework, subject to certain conditions and close monitoring, the apex bank said, adding the RBI will continuously monitor the performance of these banks under various parameters.
Eight public sector banks -- Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Central Bank of India, Indian Overseas Bank and Dena Bank -- still remain under PCA framework, which imposes lending restrictions and prevents them from expanding, among other curbs.
Commenting on the RBI's decision, Financial Services Secretary Rajiv Kumar said: "Government's sustained 4R's (Recognition, Recapitalization, Resolution, and Reform) strategy for banking transformation delivers again. 3 better-performing PSBs (BoM, BoI & OBC) exit PCA. Banks need to be more responsible, adopt high underwriting & risk management standards to avoid recurrence".
Kumar, who has been credited with undertaking multiple reforms in the banking sector, has been able to provide record amount of capital infusion in the public sector banks (PSBs).
Since commencement of clean-up in 2015-16, the recapitalisation has crossed over Rs 3 lakh crore through mix of budgetary support and market raising helping banks to make adequate provisions for the bad loans. As a result, there has been reversal in the deteriorating bad loan situation and there has been record loan recovery during the current fiscal.
Various initiatives taken by the government have yielded results, with the bad loans of public sector banks declining by over Rs 23,860 crore in the first half of the current fiscal.
At the same time, PSBs have also made a record recovery of Rs 60,726 crore in the first half of the current financial year, which is more than double the amount recovered in the corresponding period last year.
The secretary has recently said capital infusion of over Rs 83,000 crore in the coming few months in PSBs will cement India's position as fastest growing economy in the world.
Last month, the government announced infusion of Rs 28,615 crore into seven public sector banks (PSBs) through recapitalisation bonds. Out of the seven state-owned banks, Bank of India got the highest amount of Rs 10,086 crore, followed by Oriental Bank of Commerce Rs 5,500 crore and Bank of Maharashtra (Rs 4,498 crore).
Both the government and banks are fully committed to the reform process and other lenders are also working towards faster recovery, Kumar had said.
As part of the reform process, there have been slew of decisions taken to boost MSME sector and boost flow of credit to agriculture sector and retail.
The PCA framework was one of the contentious issue between the government and the RBI. The government wanted the central bank to align the PCA framework to the global norms.
The PCA framework kicks in when banks breach any of the three key regulatory trigger points -- namely capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA).
Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio, and the government and some of the independent directors of the RBI board, like S Gurumurthy, are in favour of this practice being adopted for the domestic banking sector as well.
It seems that the RBI has taken into consideration some of the concern raised by the government in the review of the performance of PCA banks.
On a review of the performance of PSBs currently under the PCA framework, it was noted that a few banks are not in breach of the PCA parameters as per their published results for the quarter ending December 2018, except Return on Assets (RoA), according to the RBI.
"However, though the RoA continues to be negative, the same is reflected in the capital adequacy indicator. These banks have provided a written commitment that they would comply with the norms of minimum regulatory capital, Net NPA and leverage ratio on an ongoing basis and have apprised the RBI of the structural and systemic improvements...," it said.
Further, it said, the government has also assured that the capital requirements of these banks will be duly factored in while making bank-wise allocations during the current financial year.
As per the latest quarterly numbers, BoI posted a loss of Rs 4,737.56 crore, BoM Rs 3,764.26 crore, while OBC made a profit of Rs 145 crore in the third quarter.