Explainer| UCO Bank out of RBI’s PCA watchlist, lending curbs after 4 years. What is PCA all about?

UCO Bank is now free to restart lending operations. The Reserve Bank of India (RBI) direction came after the bank had requested the regulator to remove if from the PCA list, after it had successively posted profits for three quarters in FY21. As on June 30, 2021, the bank's Gross NPA is at 9.37 percent and Net NPA at 3.85 percent.

UCO Bank has been in the PCA list since May 2017 and had been barred from increasing risk-weighted assets due to high NPA ratios and negative returns on assets.

What is PCA framework, to begin with?

PCA refers to the central bank’s watchlist of weak banks. The regulator imposes business restrictions, like lending curbs, on such banks.

When was the PCA framework introduced?

The RBI’s PCA framework was introduced in December 2002 as a structured early intervention mechanism, along the lines of the US Federal Deposit Insurance Corporation’s (FDIC) PCA framework. Subsequently, the framework was reviewed by the Reserve Bank, keeping in view the international best practices and recommendations of the Working Group of the Financial Stability and Development Council (FSDC) on Resolution Regimes for Financial Institutions in India (January 2014), and the Financial Sector Legislative Reforms Commission (FSLRC, March 2013).

The Revised PCA framework was issued by the Reserve Bank on April 13, 2017, and implemented with respect to banks’ financials, as on March 31, 2017.

So, when exactly does a bank fall into this list?

Well, the RBI has specified certain regulatory trigger points with respect to three parameters, i.e., capital-to-risk weighted assets ratio (CRAR), net non-performing assets (NPA) and Return on Assets (RoA), for the initiation of the process. The PCA framework is applicable only to commercial banks, and does not cover co-operative banks, non-banking financial companies (NBFCs) etc.

What are the trigger points on capital and how does the breach invite actions?

There are various stages. To give an example, if CRAR (capital to risk-weighted assets ratio) falls less than 9 per cent, the RBI asks banks to submit a capital restoration plan, restricts new businesses and dividend payments.

Also, the RBI orders recapitalisation, restrictions on borrowings from the inter-bank market, reduction of stake in subsidiaries, reduction of exposure to sensitive sectors like capital market, real estate or investment in non-SLR securities, etc.

What if CRAR falls below 6 per cent?

If CRAR is less than 6 per cent, but equal or more than 3 per cent, in addition to the actions in hitting the first trigger point, the RBI could take steps to bring in new Management/ Board, appoint consultants for business/ organisational restructuring, take steps to change ownership, and also take steps to merge the bank, if it fails to submit a recapitalisation plan.

What if it falls below 3 percent?

If CRAR is less than 3 percent, in addition to the actions upon hitting the first and second trigger points, closer monitoring and steps to merge/amalgamate/liquidate the bank or impose moratorium on the bank, if its CRAR does not improve beyond 3 percent within one year or within such extended period, will follow.

Okay. What about NPA levels?

That is the second part of the trigger to fall in the PCA list. If net NPAs rise beyond 10 percent but less than 15 percent, a special drive to reduce NPAs and contain the generation of fresh NPAs begins. The RBI subsequently reviews the bank’s loan policy and take steps to strengthen credit-appraisal skills. Subsequently, the follow-up of advances and suit filed/decreed debts starts. Also, the RBI puts in place proper credit-risk management policies and will reduce loan concentration. Further, there will be restrictions on entering new lines of business, making dividend payments and increasing its stake in subsidiaries.

What if net NPA shoots up above 15 per cent?

In addition to the actions upon hitting the trigger point mentioned above, the bank’s board is called for discussion on the CPA.

What about ROA?

That is the third parameter. If ROA is less than 0.25 percent, restrictions on accessing/renewing costly deposits and CDs kick in, and the RBI bars the bank from entering into new lines of businesses. Further, the bank’s borrowings from the inter-bank market, making dividend payments and increasing staff will be restricted.