With non-perfoming assets rising, five more state-owned banks, including Punjab National Bank, which is currently under the spotlight for the alleged fraud of over Rs 12,000 crore by billionaire diamantaire Nirav Modi, face the risk of being put under Prompt Corrective Action (PCA) Framework of the Reserve Bank of India (RBI), which will restrict their business activities, according to credit ratings agency ICRA. There are 21 public sector banks (PSBs) in India of which 11 are already under the RBI's PCA Framework.
RBI issued revised PCA framework for banks in April 2017, which put banks with net NPAs of more than 6 per cent and less than 9 per cent under risk threshhold 1.
Banks already under the PCA framework include Corporation Bank, Bank of India, IDBI Bank and Bank of Maharashtra among others.
The five lenders—Andhra Bank, Union Bank of India, Canara Bank, Punjab and Sindh Bank and PNB—which ICRA expects are also facing the risk of being placed under the PCA framework, have net NPAs over RBI's 6 per cent threshold.
At the end of the quarter ended December 31, 2017, Andhra Bank had net NPA of 7.72 per cent, PNB's net NPA ratio stood at 7.55 per cent, while Punjab and Sindh Bank and Canara Bank had net NPA of 7.20 per cent and 6.78 per cent, respectively. Union Bank had net NPAs of 6.96 per cent.
Under the provisions of RBI's PCA framework, the banks' capital, asset quality and profitability, along with the net NPA ratios and return on assets are closely monitored. Restrictions are also placed on the lender's business activities, including curbs on lending and branch expansion.
If the five lenders do come under the PCA framework, then it could result in recall of Rs 15,700 crore worth tier-I bonds, estimates ICRA.
Over the last four years, PSBs raised Rs 60,385 crore worth AT-I bonds, to shore up their tier-I capital ratios, in the wake of losses and increasing capital requirements to meet Basel III norms.
The 11 banks, which are already under the PCA framework, accounted for Rs 21,900 crore of AT-I bonds, which ICRA expects are likely to be called off in the next few weeks.
"With huge losses, the PSBs' ability to service these AT-I bonds, while adhering to their regulatory features had been steadily weakening as these bonds can be serviced through profits of the year or accumulated profits," said ICRA.
Cumulatively, 21 PSBs reported losses before taxes of over Rs 92,000 crore between the third quarter of FY2016 and third quarter of FY2018, added ICRA.
The government last year announced a huge Rs 2.11 lakh crore plan to recapitalise state-owned banks. However, the higher losses incurred by banks and the early redemption of AT-I bonds now stands to partially negate government's recapitalisation programme.