Chief executives of public sector banks, who met the new Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday, requested the central bank to relax the prompt corrective action (PCA) norms on the ground that it was hurting credit off-take. A crucial meeting of the RBI central board is scheduled on Friday.
According to sources, bankers highlighted the challenges they are facing to boost loan growth as there are 11 state-run banks under prompt corrective action. PCA was imposed on these lenders by RBI after the banks breached the risk thresholds on net non-performing assets, capital and return on assets.
Bankers expect the central bank to take a decision in the Friday’s board meeting regarding easing the PCA norms so that restrictions are withdrawn from some of the lenders.
The meeting with Mumbai-based public sector banks, in which chiefs of six lenders and Indian Banks’ Association chairman Sunil Mehta (also the chairman of Punjab National Bank) were present, will be followed by meetings with of other banks.
Bad loans in the banking system have risen sharply over the last three years, with gross NPAs crossing the ₹10 lakh crore mark. The rise in NPAs has impacted banks’ profitability and eroded their capital.
The Board of Financial Supervision (BFS) of RBI, which met last week, deliberated on the PCA issue and reviewed the performance of banks till the half year. While the government wanted the RBI to relax the PCA norms, the central bank was not in agreement with the proposal.
Lack of liquidity
The request to relax PCA norms comes at a time when growth is slowing and non-banking financial companies (NBFCs) are constrained by lack of liquidity. Since loans from NBFCs contribute almost 17% of the total credit off-take and one-third of retail credit, the crisis will hit loan growth. Since public sector banks, that have 70% of the market share have capital constraints they are unable to fill the space vacated by NBFCs. “Various issues were discussed during the meeting,” said a banking industry source. Credit flow to the MSMEs, liquidity, the February 12 circular, were among the issues that were discussed.
The controversial February 12 circular of the RBI mandated banks to restructure loans and make higher provision even if there was a default for one day.
The circular had also withdrawn all restructuring schemes that resulted in higher provision requirement for banks.
While both the banks and the government lobbied hard for relaxation of the one-day stressed asset norms the RBI did not oblige.
