BANKING GK FOR INDIAN STUDENTS / LEARNERS: Prompt corrective action of Reserve Bank of India for 11 banks public sector banks

On 11-05-2018, Dena Bank reported a net loss of Rs 1225.42 crore compared to a net loss of Rs 380.07 crore in the same quarter last year. The bank saw its gross nonperforming assets rise to 22 percent from 19.5 percent in the previous quarter. The bank reported a negative return on assets at 4.07 for the quarter ended March 2018.

The bank’s capital adequacy ratio stood at 11.09 percent and its tier-1 capital adequacy ratio at 8.81 percent. This is above the minimum tier-1 capital ratio mandated by the Basel norms.

The bank’s advances stood at Rs 65,581 crore at the end of March 2018 compared to Rs 72,574 crore in March 2017, suggesting that the bank’s loan book has anyway been contracting.

Stage Two Of Prompt Corrective Action?

While the bank did not specify the reason behind the RBI’s directive, the strictures are likely part of the RBI’s prompt corrective action (PCA) framework.

In April 2017, the RBI tightened the rules under its ‘Prompt Corrective Action Framework’ which aims to rein in lenders whose operational and financial metrics are looking weak. The new framework laid down three risk thresholds based on gross non-performing assets, net NPAs, capital adequacy ratio and return on assets. Once under the framework, restrictions are placed on dividends, branch expansion and, in some cases, lending based on the discretion of the regulator.

In Dena Bank’s case, while the capital adequacy ratio is above the regulatory minimum, the net NPA level of 11.95 percent falls in the second risk threshold. Also its negative return on assets could place in this category.

As per the RBI’s rules, banks that fall in the second risk threshold may be asked to make higher provisions and restrict branch addition. In addition, the RBI may take ‘discretionary actions’ against the bank. These actions could be ‘credit risk’ related and ‘market risk’ related among others.

Taking Stock of PCA Banks

Close to half of the government owned banks are under prompt corrective action now. On Friday, reported that the government has planned a review meeting of these 11 weak banks.

The meeting, scheduled for May 17, will take stock of the measures taken by individual banks to improve their financial position.

Reserve Bank has initiated prompt corrective action against public sector lender Dena Bank in view of high non-performing loans, restricting the bank from giving fresh credit and new hiring. The public sector lender yesterday reported widening of its net loss to Rs 1,225.42 crore in the March quarter on mounting bad loans and higher provisioning to cover them.

The net loss stood at Rs 575.26 crore in the January-March quarter of 2016-17.

Sequentially, the loss widened from Rs 380.07 crore in December quarter of 2017-18.

"Reserve Bank of India, vide their letter dated May 31, 2017, has initiated Prompt Corrective Action for Dena Bank and imposed certain restrictions, in view of high Net NPA and negative RoA ( return on assets)," the bank said in a regulatory filing.

In continuation to the above, "we wish to inform that the RBI vide their letter dated May 07, 2018 (received by the Bank on May 08, 2018) has restricted the Bank from assuming fresh credit exposure and recruitment of staff," it said further.

Dena Bank said it was put up to the Board in its meeting held on May 11, 2018.

Bank's asset quality has worsened with the gross NPAs hitting a high of 22.4 per cent of the gross advances as on March 31, 2018, from 16.27 per cent as of end-March 2017.

In value terms, the gross NPAs or bad loans rose to Rs 16,361.44 crore from Rs 12,618.73 crore.

Net NPAs were also up at 11.95 per cent (Rs 7,838.78 crore) from 10.66 per cent (Rs 7,735.12 crore).

Earlier in January this year, Allahabad Bank had informed about being placed under RBI's PCA mechanism.

The RBI has initiated similar action against other public sector banks, including IDBI Bank, Indian Overseas Bank and UCO Bank before this.

The RBI in April 2017 had issued a new set of enabling provisions under the revised PCA framework with a clause that if the bank does not show improvement then it could be either be merged or taken over by other bank.

Since April, 11 banks have been put under the corrective action framework. The latest is Allahabad Bank which informed exchanges on Wednesday that it was now subject to the RBI’s corrective action. Other banks under the corrective framework include Bank of India, Central Bank of India, IDBI Bank, UCO Bank, Dena Bank, Oriental Bank of Commerce, Indian Overseas Bank, Bank of Maharashtra and Corporation Bank. United Bank of India, which was among the first lenders to be put under corrective action in 2014, is also back on the watch list.