The Reserve Bank of India (RBI) is planning to auction distressed private banks that are under the Prompt Corrective Action (PCA) framework for a prolonged period, the Business Standard reported. This is part of the RBI’s plan to have a different rule book for distressed banks, the report said.
Under PCA, banks are temporarily put under closer scrutiny by the regulator. Subsequently, targets are given to these entities to improve their financial health on critical parameters in a time-bound manner, mainly on capital adequacy and bad assets resolution.
Currently, there are six banks under PCA. These are the Central Bank of India, UCO Bank, Indian Overseas Bank, United Bank of India, IDBI Bank and Lakshmi Vilas Bank. Of these, Lakshmi Vilas is the only private bank, while IDBI is owned by the Life Insurance Corporation of India (LIC).
A senior banking industry official, who requested anonymity, told this writer that RBI has no such plan to ‘auction’ private banks. "An authorised entity, under certain circumstances, can auction the assets of a distressed company. But, how a company/bank itself can be auctioned? These are also governed by concerned Acts," the official said.
Clampdown on co-operative banks
The RBI got a shocker last year when a major scam broke out at Punjab and Maharashtra Co-operative Bank (PMC), one of the biggest banks in the country’s co-operative sector.
The bank hid details of its loans from the RBI for a long time. Out of its total loan book of Rs 8,383 crore, as on 31 March 2019, about 70 percent was given to one real estate firm, HDIL.
The crisis is yet to be resolved. The RBI superseded the board of PMC bank in September and the process to recover money from HDIL is still an ongoing affair.
PMC was not the first co-operative bank that failed and there have been several cases in the past. But, the regulator let the sector thrive with light regulations.
Early this week, the RBI overhauled the rules for co-operative banks introducing a revised Supervisory Action Framework (SAF) under which an urban co-operative bank (UCB) will come under SAF if the net non-performing assets (NPAs) cross 6 percent of the total loans.
SAF is the equivalent of PCA for commercial banks. Depending on the financial health of the bank, RBI can impose further restrictions on lending and deposit-taking operations of the concerned bank.
The SAF comes into effect even if the bank incurs losses for a long period.
Forced mergers on the cards?
While ‘auctioning’ a distressed bank is a bit of a stretch, RBI could very well consider playing the role of a matchmaker to merge weak banks with stronger ones.
There are several instances when RBI has done ‘forced mergers’ on account of weak financial health or financial irregularities in target entities. The idea is to protect depositors’ money in the event of the bank's total collapse.
In 2004, the erstwhile Global Trust Bank was merged with Oriental Bank of Commerce (OBC). In 2006, erstwhile United Western Bank merged with IDBI and in 2010, Bank of Rajasthan merged with ICICI Bank.
The poor financial health of these targeted entities was rumoured as the reason. While these are some of the large cases of mergers on account of financial distress, a number of mergers have happened among smaller banks where promoters found synergy, with no force by the regulator.
In the cases of commercial banks under PCA and large UCBs under SAF too, there is a possibility that the regulator will look at merger options, according to senior bankers.
But remember that many banks such as Bank of India, Bank of Maharashtra and OBC that were under PCA have successfully come out of the tag. In the private sector, Dhanlaxmi Bank too managed to shed the tag. Much will also depend upon the economic recovery and ability of borrowers to generate cash flows to repay.
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