The Reserve Bank of India (RBI) has initiated prompt corrective action (PCA) against public sector lender Allahabad Bank owing to its high net non-performing assets (NPAs) and negative return on assets (RoA) for two consecutive years.
While in 2016-17, the bank’s net NPA ratio stood at 8.92% and the annualised RoA at -0.13%, in 2015-16 the net NPA was 6.76% and RoA was -0.33%.
At least half the listed state-owned lenders have now been put under corrective action including Bank of India Indian Overseas Bank, United Bank of India, Corporation Bank, Oriental Bank of Commerce, Dena Bank, Central Bank, IDBI Bank and Bank of Maharashtra. “…the Reserve Bank of India (RBI) vide their letter dated January 2, 2018 received by the bank on date has placed the bank under prompt corrective action (PCA) framework, consequent to the onsite inspection under the risk-based supervision model carried out for the year ended March 2017 and the report issued thereof,” the bank said in a regulatory filing.
Allahabad Bank added that PCA will contribute to the overall improvement in its risk management, asset quality, profitability and efficiency. Allahabad Bank executive director NK Sahoo said there will be no material impact on its normal banking operations. “Whatever we are doing is as per the turnaround plan submitted to the government and the PCA is more or less on the same lines,” he said.
According to Sahoo, the central bank has not restricted the bank from further lending. “For banks which have come under PCA, the RBI has suggested certain measures. Although we are already doing it, we have to double our efforts to see that we recover more while restricting our slippages,” Sahoo explained.
Acknowledging that the RBI has imposed the PCA owing to its high net NPA and negative RoA, Sahoo said that the moment the bank returns to profit, its RoA will turn positive. “And if we go for more recovery with less slippages, probably our net NPA figures will be maintained as per the RBI’s threshold. So things are on the right track,” he added. The RBI had released revised PCA norms last year and said that if a bank reached the level of ‘risk threshold 3’, it could end up as a candidate for amalgamation, reconstruction or even be wound up.
Among the many metrics that are used to gauge how weak a lender is are capital, net NPAs, RoA and tier 1 leverage ratio. A capital adequacy of less than 3.625% would leave the lender at the risk threshold 3. Today, a bank needs to have a minimum capital of 10.25%.
If net NPAs are 12% or more, a bank will find itself classified as threshold 3. Under PCA, banks face restrictions on distributing dividends and remitting profits. The owner — the government in this case — may be asked to infuse capital into the lender. That apart, lenders would also be stopped from expanding their branch networks. It would need to maintain higher provisions and management compensation and directors’ fees would be capped