With the financials of stressed public sector banks (PSBs) taking a rapid turn for the worse, the RBI has been tightening the screws on their operations and lending activities under the Prompt Corrective Action (PCA) framework. Dena Bank has been barred from fresh lending or hiring activities and Allahabad Bank has faced curbs on its high-risk loan book. Of the 11 PSBs that the RBI had placed on its PCA watchlist last year, many are now on the verge of breaching critical risk threshold levels. But while this is supposed to mark out a bank as a candidate for amalgamation, reconstruction or winding up, neither the RBI nor the Centre seem prepared to bite the bullet on such drastic resolution measures for PSBs.
The RBI’s revised PCA framework, implemented in 2017, monitors and classifies banks into three risk buckets based on their capital adequacy, net non-performing assets (NPAs), return on assets and leverage. Though PCA is invoked as soon as any bank hits the RBI’s maximum thresholds on these parameters, risk level 3 kicks in at extremes — when net NPAs top 12 per cent, core capital falls below 3.6 per cent and so on. That many of the PSBs swept into PCA last year are already on the brink, shows how quickly their finances have deteriorated. The RBI’s sudden decision in February to revoke all earlier corporate debt restructuring schemes, has expedited the slide. However, now that many banks are sliding down this slippery slope, the way forward for the banks, their investors and depositors is far from clear. For one, the RBI has been quite wary of deploying the more stringent weapons in its PCA armoury against PSBs, that can trigger deep-rooted reforms. While it has imposed curbs on lending, hiring and risk-weighted assets, it has stopped short of superseding bank Boards, insisting on capital, curbing dividends or barring retail deposit-taking. The regulator is quite clearly hamstrung on flexing its muscles with State-owned banks. Two, these PSBs have so far written off only a fraction of their stressed assets. With more to come, it isn’t clear how they will turn around their operations with hobbled lending. Three, with the recent dents to PSBs’ capital base, the latest round of ‘last-resort’ recapitalisation by the Centre, amounting to ₹88,139 crore, now appears likely to fall short of the banks’ needs.
Overall, the PCA framework was designed to head off incipient crises at banks arising in the normal course of business. But most of the PSBs now under PCA are grappling with mountainous legacy loans which are too far gone for resolution. Thus, it is time both the RBI and the Government stopped prevaricating on this issue and took a realistic call on the haircuts needed and the mechanism for taking them. Yes, pushing PSBs to merge or scale down, without shaking depositor confidence in them, is far from easy. But this has now become imperative, as the Centre cannot keep throwing good taxpayer money after bad banks.