Panel warns RBI over "knee-jerk" measures, expresses apprehension over PCA
A Parliamentary Committee has expressed apprehension over the Prompt Corrective Action (PCA) framework, a measure to check banks' financial health, of the Reserve Bank of India (RBI) saying that it may end up bringing more and more banks under the PCA.
A Parliamentary Committee has expressed apprehension over the Prompt Corrective Action (PCA) framework, a measure to check banks' financial health, of the Reserve Bank of India (RBI) saying that it may end up bringing more and more banks under the PCA, according to sources having access to the report of the Standing Committee on Finance.
The report, titled 'Banking Sector in India — Issues, Challenges and the Way Forward including Non-Performing Assets/Stressed Assets in Banks/Financial Institutions' was adopted at the meeting of the Parliamentary Standing Committee on Finance here in New Delhi. It is likely to be placed in the winter session of Parliament.
The panel has recommended that the RBI should provide a roadmap for 11 public sector banks to come out of PCA framework within a stipulated time-frame, sources said. Both the RBI and government should constantly monitor banks and relax or review PCA in case of banks where even retail banking is prohibited, according to the sources.
The committee also advised the central bank against resorting to "knee-jerk" measures such as discontinuing the practice of issuing Letter of Undertaking (LoU), a bank guarantee that allows an importer to get short-term credit from another Indian bank's overseas branch to pay suppliers abroad. The RBI discontinued the LoUs after it came to light that the financial instrument was misused by billionaire jeweller Nirav Modi misused to defraud the Punjab National Bank in the biggest scam of corporate sector.
On the issue of RBI seeking more powers, the committee recommended the government to critically examine the submission of RBI to empower the regulator in respect of PSBs while evaluating the existing powers as far as digressions by private banks such as ICCI Bank and HDFC Bank is concerned, sources said.
The committee has expressed concern over the quantum of funds involved in frauds in the banks and other financial institutions during 2017-18. "It increased to Rs 32,048 crore during last fiscal as against Rs 23,930 crore in the previous year mainly due to banks such as HDFC, ICICI and PNB. Of this, public sector banks, it has gone up significantly from Rs 19,527 crore to Rs 29,246 crore mainly due to PNB fraud," the report points out as per the sources.
The committee has also recommended that the RBI should review the requirement for a higher capital percentage under both Basel III and International Financial Reporting Standards (IFRS) beyond even global norms, which stipulate the requisite minimum percentage of 9.5% while the same for our banks is much higher at 10.5%, the sources said.
"Such a significant percentage point differential would actually require our banks to needlessly maintain a much higher capital base and baggage, which is uncalled for, particularly at this critical juncture when our banks are short of capital and their provisioning requirement is also growing higher," sources familiar with the report said.
RBI has asked banks to maintain Capital to Risk-weighted Assets Ratio (CRAR) 1% higher than global Basel norms both under Basel II and Basel III framework. The committee finds that CRAR norm of 11.5% by the end of 2018-19 under the Basel III by RBI is higher by 3.5% than the CRAR required under global Basel II framework, the sources said.
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In respect of nine PSBs - Central Bank of India, Andhra Bank, OBC, Corporation Bank, Vijaya Bank, Bank of Maharashtra, United Bank of India, Dena Bank and Punjab & Sind Bank which had aggregate risk-weighted assets of Rs 9.93 lakh crore as of March 2018, this translates into additional capital requirement of Rs 35,000 crore.
Such stringent norms stipulated by the RBI for our banks, particularly these nine banks which are not active globally, is unrealistic and unwarranted, the committee observed as per the sources.
- On RBI seeking more powers, the committee has recommended the government to critically examine the submission of RBI to empower the regulator in respect of PSBs
- The committee has recommended the RBI should review the requirement for a higher capital percentage under both Basel III and IFRS beyond even global norms
Source: DNA Money