Delivering Under Pressure: Four Public Sector Banks Expected To Be Removed From RBI’s Prompt Corrective Action List

The Union Finance Ministry, headed by Arun Jaitley, expects around three to four PSBs (Public Sector Banks) to be removed from the PCA (Prompt Corrective Action) framework, as reported by Mint. Out of the 21 state-owned banks, as many as 11 are currently under PCA of the RBI (Reserve Bank of India).

After the successful conclusion of the monthly RBI-Government board meeting on 16 November, India’s central bank agreed to relax the guidelines for PCA. This along with the improvement in the balance sheets of PSBs, under supervision, has contributed to this development.

A bank is put under the PCA system by the RBI when its financial health is in peril, and drastic steps are necessary to prevent fallout in India’s economic system. When a bank breaches certain risk thresholds for three parameters - capital, asset quality (which is tracked in terms of the net Non-Performing Assets ratio) and profitability - the central bank moves in to restrict the bank’s lending activities and branch expansion to improve efficiency and conserve scarce capital.

However, when banks are put under PCA, the credit available in the economy becomes limited. This hampers investment and consumption, and economic growth is artificially constrained.

But it should be noted that, despite the PCA, some PSBs have been performing well. Such banks increased their share in the total volume of retail loans (credit to individuals and families) by 400 basis points (four per cent). This takes their share to a healthy 19 per cent, in the past four years.

Also Read:

Government Should Not Lock Horns With RBI On PCA