Post IDBI Bank, other 3 PSBs may be out of PCA soon

The exit of IDBI Bank from the Prompt Corrective Action (PCA) framework of the Reserve Bank of India could be precursor to the remaining three PSU banks coming out of PCA anytime soon. The government has also indicated that it’s ready to infuse more capital into these banks to improve their financial position.

While the government has started discussions with the RBI regarding the exit of Indian Overseas Bank out of the PCA framework, progress is expected on Central Bank of India and UCO Bank after their fourth quarter results are presented or even before that.

Government sources said PCA banks have shown a steady improvement in profitability, capital levels as well as on the non-performing assets (NPA) front. “We are very hopeful that remaining three banks will be out of the PCA rules and able to operate normally. Already, lot of progress has been made on Indian Overseas Bank and there have been discussions with the regulator on this front,” a senior government official said. The government is also ready to infuse further capital in these banks if the regulator so requires, he said.

The Board for Financial Supervision (BFS) of the RBI is expected to take a call on taking out the three banks from PCA. BFS is constituted by co-opting four Directors from the Central Board as Members and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, traditionally the Deputy Governor in charge of supervision, is nominated as the Vice-Chairman of the Board.

The PCA rules impose various restrictions including on lending activity, branch expansion, management compensation, payment of dividend, staff recruitment and increasing the size of loan book. These rules are aimed at resurrecting weak and stressed banks by giving them time to put their house in order, improve profitability and capital levels. IDBI Bank exiting the PCA framework would pave the way for government selling its remaining stake in lender.

Sources said the Finance Ministry had written to the RBI asking why IDBI Bank continued in PCA despite improvement in its finances.

BFS is constituted by co-opting four Directors from the Central Board as Members and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, traditionally, the Deputy Governor in charge of supervision, is nominated as the Vice-Chairman of the Board.

The last BFS meeting held on February 18, 2021, decided to take out IDBI from the PCA framework. As the Board is required to meet normally once every month, the next meeting will be in March. It deliberates on inspection reports, periodic reviews related to banking and non-banking sectors and policy matters arising out of or having relevance to the supervisory functions of the Reserve Bank.

In 2019, the RBI took out three public sector banks — Bank of India, Bank of Maharashtra and Oriental Bank of Commerce — from the PCA framework and lifted various restrictions on lending and expansion of businesses. Dena Bank, United Bank of India, Corporation Bank and Allahabad Bank which were under PCA were merged with other PSBs last year.

Banking sources said privatisation of two PSU banks will be done after the remaining PSU banks are taken out from the framework. The RBI has specified prompt corrective action framework to resurrect weak banks by conserving capital and improving operating performance. The government has impressed upon the RBI to provide an exit to banks that show an improvement in performance. Since PCA imposes operational and lending restrictions on banks depending upon breach of certain parameters, pulling them out of the PCA will enable them restart lending especially to MSMEs.