Fresh capital may not help banks exit PCA immediately

KOLKATA: Central Bank of India, Indian Overseas Bank and Uco Bank may not exit the prompt corrective action (PCA) framework immediately despite the proposed capital infusion by the government as the size of capital would not cover their requirement, experts in the field said.

They may also tend to use most of the new capital to expand lending instead of making loan provisions unlike what several other weak banks did earlier.

The government has kept four of five banks under PCA framework outside the mega bank merger process. These are Central Bank of India, IDBI Bank, Indian Overseas Bank and Uco Bank.

“The announced capital infusion is unlikely to be sufficient for taking these banks out of PCA in immediate future,” said Anil Gupta, vice president and Head of financial sector ratings at ICRA.

For example, Uco Bank which would receive Rs 2,100 crore require about Rs 4000 crore of fresh capital. Likewise, Central Bank of India would get Rs 3,300 crore against a requirement of Rs 5000 crore, Gupta said.

United Bank of India, which is also under PCA but has returned to making profits, will cease to exist upon merger. On the other hand, the future for IDBI bank will depend on how successfully it raised capital to boost its common equity tier-1 capital from a poor 5.9% against the stipulated 8%. No capital infusion has been announced for the Life Insurance Corporation-owned IDBI Bank.

Finance minister Nirmala Sitharaman was categorical in saying that all these banks getting capital dose should support loan growth to chase the government’s goal to make India a $5 trillion economy by 2024.

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However, there will not be any immediate improvement in these banks’ credit metrics as all of them have relatively weak solvency profiles, said Srikanth Vadlamani, vice president (financial institutions group) at Moody’s Investors Service.

While some believe the finance minister’s comment is an indication that the PCA banks are going to use use the capital to shore up capital adequacy to boost lending, another school thinks this the minister’s comment is for the stronger banks and the PCA banks would adjust the capital to make loan provision to bring down net non-performing assets below 6%, a key parameter to exit PCA.

“The government has another Rs 15000 crore for bank recapitalisation. It may be given to help these banks get out of PCA,” said ICRA’s Gupta.

Chief executives of IOB or Uco had said that their banks would get out of PCA by the end of FY20.

Earlier in the year, lenders like Bank of India, Bank of Maharshtra, or Allahabad Bank used the capital received from the government to shore up their capital funds and increased their loan loss provision to ensure their exit from the clutch of PCA framework.



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