High net non-performing assets (NNPA) and negative return on assets (ROA) have led the Reserve Bank of India to invoke Prompt Corrective Action (PCA) on IDBI Bank.
Based on the recently tightened PCA framework for banks, the mandatory action plan for IDBI Bank could include restrictions on dividend distribution and branch expansion, and higher provisions.
Going by the results for the nine months ended December 2016 (and FY17 wherever available), the RBI could soon impose similar corrective action plans on other lenders such as IOB, Dena Bank, United Bank, UCO, Oriental Bank of Commerce and Bank of Maharashtra.
Depending on the levels, there will be restrictions on dividend distribution, branch expansion, and management compensation.
Breach of the third level of threshold of minimum core equity (CET) would identify a bank as a likely candidate for resolution through tools such as amalgamation, reconstruction, and winding up.
The recent revision in the PCA framework had set the bar higher, by increasing the requirement of total capital adequacy levels and additionally introducing the minimum core equity criteria.
Banks with total capital adequacy (CRAR) of less than 10.25 per cent but more than 7.75 per cent will fall under threshold 1. Those with CRAR of more than 6.25 per cent but less than 7.75 per cent will fall in the second threshold. In case a bank’s CET falls below 3.625 per cent it gets bucketed under the third threshold level.
Also, in a bid to ensure that banks maintain higher provision coverage, the revised guidelines have lowered the net NPA levels to be maintained to avoid PCA.
From 10 per cent earlier, banks need to have net NPA of lower than 6 per cent to avoid PCA. Banks that have a net NPA of 6 per cent or more but less than 9 per cent fall under threshold 1, and those over 9 per cent but less than 12 per cent fall under the second level. Banks with net NPA of 12 per cent or more fall under the third threshold level.
On the profitability front, banks with negative ROA for two, three and four consecutive years fall under threshold 1, threshold 2 and threshold 3, respectively.
Based on the data available until December 2016, two banks — Dhanlaxmi (9.24 per cent) and Central Bank of India (9.99 per cent) — fall under the threshold 1 level based on the minimum CRAR criteria.
Eight banks — Corporation Bank, Canara Bank, Allahabad Bank, Central Bank of India, Punjab & Sind Bank, Union Bank, Andhra Bank and Bank of India — fall under threshold 1 on account of high net NPA.
Seven others — Bank of Maharashtra, United Bank, Oriental Bank of Commerce, IDBI Bank, Dena Bank, PNB and UCO Bank — fall under threshold 2 as their net NPAs are 9 per cent or more. Only one bank, IOB, falls under threshold 3, with net NPA of more than 12 per cent as of December 2016.
On the profitability front again, if data for the nine months ended December 2016 is considered, then IOB falls under threshold 2 for reporting negative ROAs for three consecutive years.
IDBI Bank falls under threshold 1 for recording negative ROAs for two years in a row. UCO, Dena Bank, Bank of India, Central Bank and Allahabad Bank are others that fall in this bucket.