Four public sector banks are expected to emerge from the prompt corrective action (PCA) framework, based on their improved financial performance, this paper reported on November 9. It is proof that PCA, which involves taking remedial steps to nurse banks back to health, is effective.
This should persuade the government to abandon its demand that the Reserve Bank of India abandon PCA and allow even banks that have been crippled by bad loans to resume lending. The government’s trespass on to the regulatory turf will seriously undermine market confidence.
Stringent regulation is necessary, given that PCA banks are a part of the interconnected payments and credit system and pose a threat to the entire financial sector, if not set right. Ego clashes must not thwart what is good for these banks.
The PCA framework is meant to curtail further losses and prevent erosion of capital to bring in stability in these banks. It places restrictions on dividend distribution, branch expansion and directors’ compensation, besides mandating banks to set aside more capital against bad loans.
The intent to reduce the scope of discretion and lower the risks on banks’ balance sheets is sound. “Like Odysseus, bank regulators tie themselves to the mast to evade the voices of the forbearance sirens,” RBI deputy governor Viral Acharya said at a lecture in IIT Mumbai last month.
His study suggests that the loss-absorption capacity of PCA banks is on the mend. However, there is some distance to go in their catch up to healthy levels. This, in turn, calls for giving RBI the full freedom to exercise its regulatory powers.
The government earns full credit for bringing in the Insolvency and Bankruptcy Code, which is playing a major role in resolving bad loans and persuading promoters to pay off their dues to banks, for fear of losing control of their cash cows.
Augmentation of bank capital will further improve their lending capacity, and bring weak banks out of PCA. The way to end the PCA regime is to strengthen the banks’ financials, both through resolution of bad loans and infusion of fresh capital.
Source: Economic Times, November 11, 2018