The government expects four public sector banks (PSBs) to graduate from the Reserve Bank’s prompt corrective action framework based on their improved financial performance. 

The government will cite this to persuade RBI to relax the PCA regime for the remaining seven banks so that they can also emerge from it quickly and start lending again, said a finance ministry official. 

This is one of the issues over which the government and the regulator are in conflict. “Easing of certain restrictions under PCA will also help in faster recoveries,” the official said. 

The banks expected to exit PCA include Bank of India, Bank of Maharashtra and Corporation Bank. A total of 11 state-run lenders are under the framework. “The turnaround should happen by the end of the third quarter,” he said. “This also shows that PSBs are diligently following the action plan shared with the government.” 

The government has already linked any further capital support to performance. Banks under PCA have to reduce risk assets, face restrictions on credit expansion to unrated borrowers, sell assets and put in place a recovery plan. 

The central bank monitors PCA banks on their capital, asset quality and profitability in order to prevent bad loans from increasing further. The government has complained that the large number of PCA banks has impacted credit growth, thereby curtailing investment, growth and job creation. 

RBI has strongly defended the PCA framework in the past. Last month, RBI deputy governor Viral Acharya had said that any relaxation in the PCA imposed on weak banks should be avoided. 

“Imposition of PCA can thus be seen as first, stabilising the banks at risk, and then, undertaking the deeper bank reforms needed for long-term viability of the business model of these banks,” he had said. That was the same speech in which he warned about the risks of undermining the regulator’s autonomy. 

ET reported earlier that the government had initiated consultations with RBI on a dozen issues under Section 7 of the RBI Act. The PCA framework is one of the issues over which relaxation is being sought. The government expects some of these issues to be resolved during the next meeting of the RBI board on November 19. 

“Based on their current projections, it is expected that some PSBs may be able to not only bring down their bad loans, (and) make adequate provisions but also post marginal profit,” said the official cited above. 

The government is hopeful that bad loans at state-run banks will shrink as large-value accounts get resolved through the Insolvency and Bankruptcy Code process. Public sector lenders will surpass the target of loan recovery set at Rs 1.8 lakh crore for FY19, said a senior government official aware of the deliberations. 

“The government has addressed the key issue of loan recovery, which was mostly mired in legal troubles, through the bankruptcy code. It has started showing results, and now is the time to support banks and give them that growth capital,” he said. Banks recovered Rs 36,551 crore in the first quarter of FY19. In FY18, banks had recovered Rs 74,562 crore. #casansaar (Source - Economic Times)