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With the government announcing another round of capital infusion into public sector banks (PSBs) last week, Bank of India and Corporation Bank seem to the frontrunners among the four-five PSBs to resume normal lending operations outside the prompt corrective action (PCA) framework from FY2020, according to a Kotak Securities report.
Additional infusion
The government has sought Parliament’s approval for an additional round of capital infusion worth ₹41,000 crore into PSBs for FY2019. This is in addition to the previously declared capital infusion of ₹1.40 lakh crore.
Kotak Securities assessed that the total remaining amount to be infused over the next three months is ₹83,000 crore.
“The distribution of capital is not clear, but it does appear that the government is keen that all financial institutions are in better shape to restart lending with full freedom as a few large ones were constrained by being classified under PCA,” said the report.
Poor asset quality
PCA is a structured early intervention and resolution mechanism prescribed by regulators for banks that becomes under-capitalised due to poor asset quality or vulnerable due to loss of profitability.
PCA involves imposition of some restrictions on banks such as on dividend distribution/remittance of profits, branch expansion and management compensation. It could also require promoters/owners/parents to bring in more capital and higher provisioning requirement.
Such actions are aimed at nursing the banks back to health.
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