RBI to initiate Prompt Corrective Action against more banks with bad loans after IDBI, UCO?

Many Public Sector Banks (PSBs) that have made headlines over their falling financials have now caught the eye of the Reserve Bank of India.

RBI officials have been in correspondence with the top management of banks to determine their stability and initiate prompt corrective action (PCA), if necessary, under the new regulatory guidelines, reported The Economic Times.

The guidelines under PCA allows the RBI to take strong action against the management of banks, if they have faltered, and the power to restructure, including carrying out merger of poorly performing banks with stronger ones.

In fact, last week, the RBI initiated the PCA against IDBI which had a net bad loans ratio of 9.61 percent as of December. The PCA imposes various restrictions on the lender including on fresh loans and dividend distribution. The RBI initiated the PCA against UCO bank. The bank's net loss in the March quarter was Rs 588.19 crore.

Now, the RBI is looking into other banks burdened with bad loans. The RBI officials are reportedly holding meetings with such banks to discuss the state of affairs and plan a course correction, before they announce their financial results. The RBI, however, has not confirmed these meetings.

Among the banks whose future could be in the hands of the RBI are the Dena Bank and the Central Bank of India which have reported gross NPAs above 6%, and suffered losses for two consecutive years.

The data on advances and NPAs of domestic banks, as provided by the Reserve bank of India (RBI), shows that the Gross NPAs have registered more than a threefold increase, from Rs 1,759 billion in 2013 to Rs 5,504 billion in 2016. Total advances (or bank loans) have registered 8 per cent compound annual growth rate (CAGR) over the same period.

Gross NPAs as a ratio of total gross advances have increased from 3.4 per cent in 2013 to 8 per cent in 2016 and the public sector banks have accounted for more than a lion's share of these. In 2013, they accounted for 88 per cent of the total gross NPAs of the banks and in 2016, their share increased to 91 per cent.

There are two conclusions to be drawn here. First, the banks' loan growth rate has been tepid for the period when NPAs have witnessed a sharp increase. Second, the NPAs seem to be more concentrated in the books of PSU banks. The latter is not surprising, given that PSU banks account for more than 70 per cent market share of the Indian banking sector.