Six more state-run banks are at risk of entering the Reserve Bank of India’s prompt corrective action (PCA) framework, officials said. These include Punjab National Bank, Union Bank of India and Syndicate Bank, they said, adding that this may reduce the chances of the finance ministry’s plans to sell the good loans of weak banks to stronger lenders coming to fruition. 

If the Reserve Bank of India imposes restrictions on these lenders in the next one month, it will bring the number of state-run banks under the PCA framework to 17. The central bank imposed PCA restrictions on Allahabad Bank in May, including a directive to reduce exposure to unrated and high-risk advances. Dena Bank was also asked to avoid taking fresh exposures. 

A senior finance ministry official, however, said the banking regulator may give some relief given these lenders are not falling behind on all indicators. If the lenders don’t come under PCA, there is a chance the plan to sell healthy loans may work, he said. 

“The banks in various discussions with the government and also the Reserve Bank have said that they will be able to recover in the next one or two quarters. If the RBI imposes restrictions under PCA, it will be difficult for them to turn around quickly,” he said, adding that RBI may be inclined to give them some leeway. “Some talks have been held.” 

Another official said that if even three banks are put under PCA, the idea to set up a consortium of banks that will take over good loans of banks under PCA will not work out. “It also does not make sense for these banks to take over these loans if there are lending restrictions,” he added. 

PCA involves imposition of various curbs such as stopping branch expansion, halting dividend payments, limiting loan limits, audits and restructuring if warranted. State-owned banks currently under PCA are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra. 

“It is a bad idea to take performing loans out of the books of already struggling banks and saddle them with bad loans,” said MP Shorawala, a former independent director with Central Bank of India. “This could have worked if the government had consolidation plans.”

Last week, acting finance minister Piyush Goyal held a meeting with heads of public sector banks based in the west and south. After the meeting, Goyal had said that Bank of Baroda chief PS Jayakumar will formulate a strategy regarding state-owned banks taking over good loans of banks under PCA. Goyal has charge of the finance portfolio pending Arun Jaitley’s return from medical leave. 

The government has also set up a committee under the chairmanship of Sunil Mehta, non-executive chairman of Punjab National Bank, to examine the setting up of an asset reconstruction company and/or asset management company for faster resolution of stressed assets involving multiple state-owned lenders. #casansaar (Source - Economic Times)