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The Reserve Bank of India on Thursday said along with orderly resolution of banks’ stressed assets, it will also seek resolution of the weakest bank balance sheets under the aegis of a revised prompt corrective action (PCA) framework.
This could possibly be seen as a move to address the country’s twin balance sheet problem — over-leveraged companies and bad-loan-encumbered banks.
Under the extant PCA framework,the RBI places restrictions on weak banks in respect of payment of capital distribution and management fees, the growth of assets, requiring prior approval of certain expansion proposals, and requiring submission of a capital restoration plan.
“Having completed the Asset Quality Review (AQR) of our banks, and with several other critical ingredients in place — the Insolvency and Bankruptcy Code (IBC) and the Oversight Committee, the RBI has been preparing actively for the next steps for an orderly resolution of banks’ stressed assets.
“This will be undertaken concomitantly with resolution of the weakest bank balance sheets under the aegis of a revised prompt corrective action framework and our new enforcement department that has started its work this week,” said Governor Urjit Patel. AQR was meant to force banks to recognise the true state of their balance sheets.
Under the extant PCA framework,the RBI places restrictions on weak banks in respect of payment of capital distributions and management fees, the growth of assets, requiring prior approval of certain expansion proposals, and requiring submission of a capital restoration plan.
“We reiterate that further creeping forbearance in the treatment of bank losses is untenable and costly for the rest of the economy.
“The measures that will be announced soon to deal with banks’ stressed assets and weak balance sheets along with the institutional strengthening (creation of a new new enforcement department) that we just alluded to should help engender confidence in the banking system, restore corporate demand and put us on the virtuous path of healthy bank credit and industrial growth,” said Patel.
The Governor underscored that the revised PCA will trigger actions by the RBI vis-a-vis specific banks.
“The IBC is now in place. The RBI’s enforcement department has started its work and the fact of the matter is that there seems to be a renewed commitment from all sides, including the government, that we now need to address this (stressed assets and weak bank balance sheets) in an even more forceful manner than we have in the past,” he said.
SS Mundra, Deputy Governor, said the PCA framework will be put in public domain by mid-April and then it will become operative.
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