The Untold Story of PCA

Prompt Corrective Action (PCA) is a safeguarding framework applied by Reserve Bank of India (RBI) on the functioning of banks in the country. PCA guidelines are prefixed by RBI. PCA risk threshold are mainly defined in terms of Capital, Asset Quality, Profitability, and Leverage:

Exhibit : PCA Indicators
Capital	CRAR- Minimum regulatory prescription for Capital to Risk Assets Ratio + applicable Capital Conservation Buffer (CCB) Current minimum RBI prescription is 10.875% (9% minimum total capital plus 1.875% of CCB). And/Or Common Equity Tier 1 (CET 1 minimum) + applicable CCB. Current minimum RBI prescription is 7.375% (5.5% plus 1.875% of CCB)
Asset Quality	Net Non-performing advances (NNPA) ratio. This should be maintained at less than 6%.
Profitability	Return on assets (ROA) (ROA is the percentage of profit after tax to average total assets). Banks should not have negative ROA for two consecutive years.
Leverage	Tier 1 Leverage ratio. This should be maintained above 4%.

Any bank breaching/ not maintaining the risk threshold set under the guidelines is subject to imposing of PCA restrictions by RBI. Banks falling under PCA face restriction/control on credit expansions, and are required to reduce risk assets, loan concentrations apart from many other corrective actions to be taken as per RBI directives.

The spiralling level of growing NPAs (reached to about Rs.10.39 trillions in FY 18) in the country has led to eleven public sector banks namely Allahabad Bank, Bank of India, Bank of Maharashtra, Central Bank of India, Corporation Bank, Dena Bank, Indian Overseas Bank, IDBI Bank, Oriental Bank of Commerce, Uco Bank and United Bank of India, falling under PCA.

When eleven out of the 21 public sector banks face PCA with resultant credit restrictions/controls then it causes cascading negative effects on the industry and industrial growth which is already struggling in a recessionary environment. However, the issue does not end at the formal credit restrictions. PCA comes with its adverse side effects also.

The credit restriction/controls have not only stopped the new credit dispersion, it has affected also the existing credit baskets. The managements of these banks have become comparatively conservative and cautious in their approach in rolling over of even the existing credit facilities to the industries by increasing the pricing, margins, and stipulating various other terms and conditions which are difficult to afford when industries are still adjusting to the double whammy impact of demonetization and GST. LoU/LoC instruments helping in availing finance at cheaper cost in Buyer’s Credit route have been already discontinued by the regulator. The liquidity crisis caused by IL&FS fiasco has further worsened the situation.

Many of the corporate borrowers already suffering from lower demand, shrinking margins, extended operating cycles, stretched receivable periods, tight liquidity position have been told by PCA banks to find new lenders to shift the existing credit facilities or for meeting their additional credit requirements. However, the non PCA banks have been also treading cautiously in their lending approach towards such borrowers or avoiding exposure to credit starve sectors such as steel, infrastructure, construction, textile etc. In fact some of the non PCA banks lowered their bank line exposure to PCA banks and started directly/indirectly declining discounting of bills issued under the LCs of PCA banks. Such reactions within banking industry have disappointed MSME/mid corporate borrowers. 

As per Economic indicators, the growth in credit to industry was virtually nil in first nine months of FY 2018-19. The growth of 7.70% reflected in bank credits during the first nine months of FY 2018-19 is mainly driven by retail and service sectors and manufacturing sector is lagging behind on this front. As per Index of Industrial Production (IIP) numbers, as of Nov 2018, the growth in IIP was mere 5%. In this environment, the formal impact of PCA on credit control has caused multi fold impact with indirect hit of credit squeeze.

Many borrowers have been cancelled sanctioned limits/loans by PCA banks. This has affected the business plans of corporates specially the MSME/mid corporates. The funding starvation caused by PCA forced many entrepreneurs to scale down/shelve their project plans. The sudden credit squeeze caused by these banks have created enormous pressure on the liquidity of MSME/mid corporates.  Many corporate are still struggling to adjust to this new situation. If the situation persists for long, the entrepreneurs may throw the towel and there could be increase in NPAs.

While efforts are being made by policy makers to salvage the economy from recession and encourage entrepreneurs for increasing private capital expenditure by setting up Greenfield / Brownfield projects, the entrepreneurs are facing a situation where banks are following cautious approach in corporate lending and chasing retail business.

With the Government’s lobbying with regulator in the positive environment of improving recovery through IBC, improving performance of some of the PCA banks, recapitalization of some of the banks by Govt/other stakeholders, change in guard at the regulator etc., it is expected that RBI may bring some banks out of PCA. In fact recently, RBI has decided to release Bank of India, Bank of Maharashtra, and Oriental Bank of Commerce from PCA. The fresh capital infusion announced by GoI for Allahabad Bank and Corporation Bank is also expected to help these banks coming out of PCA. Restoration of LoU/LoC for availing Buyer’s Credit with proper safeguards would be a boost not only to the corporate sector but also to the businesses of the foreign branches of Indian banks. Presently, when banks are competing to garner deposits at higher costs, a low rate of interest regime seems to be a distant dream, but if it happens (considering the GoI’s/regulator’s efforts in this direction), it would be a blessing in disguise for the industries. These positive measures would help in improving the liquidity starving industries and avoid unwanted new NPAs. However, the pain caused by PCA coupled with impact of LoU/LoC ban, IL&FS debacle and other such events, leading to credit squeeze shall be an unforgettable excruciating experience for the entrepreneurs and financial market forever.

Disclaimer: The views expressed in the article above are personal views of the author and should not be thought to represent official views, ideas, or policies of any agency or institution.

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