Govt capital infusion for six banks. Banks coming out of PCA framework may not see sudden growth in credit

The recent exit of six banks from the Prompt Corrective Action (PCA) measure of the RBI may not be enough to immediately spur credit growth. In fact, stepping up of loan disbursements by some of these banks, which are still not “too strong”, may exert pressure on asset quality, thereby raising fear of them slipping back into PCA, say industry sources.

As per the recent RBI notification, as many as six banks, including Bank of Maharashtra, Bank of India, Oriental Bank of Commerce, Dhanlaxmi Bank, Allahabad Bank and Corporation Bank, are out of the PCA framework this year. The PCA framework kicks in when there is a breach in any of the four key regulatory parameters, including capital-to-risk-weighted assets ratio, net non-performing assets (NPA), return on assets (profitability), and leverage ratio.

Asset quality woes

While the capital situation of most banks have shown improvement, particularly in the third quarter of this fiscal due to fund infusion by the government, asset quality still remains a concern. Hence, any quick and sudden expansion in the credit book, may adversely impact banks unless they have put proper risk management practices in place. According to Krishnan Sitaraman, Senior Director, Crisil Ratings, it is difficult to rule out the possibility of these banks slipping back into PCA because they have already been there once. It would ideally depend on individual banks, and what steps they have taken to put in place credit appraisal and risk management processes to ensure lower NPAs.

“Many of them seem to have improved on their processes to ensure lower NPAs, but that (whether that is efficient enough or not) only time will tell,” Sitaraman told BusinessLine .

But, Ashvin Parekh, Managing Director, Ashvin Parekh Advisory Services, feels that little has changed on the corporate governance side of banks. Hence, the risk of slippages happening and impacting banks’ asset quality remain. “Bankers love to expand credit rather than focus on recovery. Nothing has changed...corporate governance has not changed,” he said.

Expanding credit

While under PCA, these banks could only lend to select sectors such as retail, MSME and agriculture. Though it would be desirable that these banks expand and broadbase their lending, particularly at a time when non-bank finance companies are slowing down due to liquidity issues, it needs to be seen if this is achievable.

“Coming out of PCA means they will have more flexibility in lending operations, but they also have to ensure that their capital adequacy levels remain within regulatory requirements,” said Sitaraman.

However, if banks can step up lending to other sectors, it will give a boost to their interest income and help improve profitability. The economy, as a whole, will also benefit as the availability of credit will improve.

“Earlier, private banks and non-PCA banks were doing more of the lending. Now, with more banks coming out of PCA framework, they can lend to a wider cross-section and availability of credit will be better,” he added.

With overall improvement in credit culture due to the Insolvency and Bankruptcy Code and “reasonable traction” in resolution of cases under NCLT, Sitaraman expects “tangible improvement” in banks’ profitability coming in from the first quarter of next fiscal.

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