What does PCA against Dena Bank and UCO Bank mean to Banking Industry?
Last week, RBI has initiated actions against Dena Bank and UCO Bank putting them under PCA framework. While Banking Industry was in shock with such actions, many experts believe that this is good for banking industry. Bringing banks under PCA would mean putting several restrictions to the bank in terms of various parameters. What is Prompt Corrective Action (PCA) in India? What are the PCA Guidelines? What are the restrictions RBI can impose to banks under PCA framework?
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What is Prompt Correction Action (PCA) in India?
Prompt Corrective Action (PCA) means where Banking Regulator (RBI) can impose several restrictions on banks based on triggering certain thresholds. It includes mandatory restrictions and discretionary restrictions.
What are Prompt Corrective Action (PCA) Guidelines in 2017?
Last month, RBI has revised the PCA framework and brought more tightening guidelines to the banks in India. Here are the features of PCA.
PCA allows RBI to place several restrictions on banks. It includes mandatory restrictions and discretionary restrictions.
As per mandatory restrictions, RBI can stop bank in branch expansion, restrict dividend payments, restrictions on directors compensation, cap on banking lending limit to one entity or for a sector.
As per discretionary restrictions, RBI can put restrictions to banks by having special audits, restructuring operations, activities of recovery plans, asking promoters to change the management, supersede and overtake company board.
The revised guidelines are effective from 1-Apr-17 and the financials that would be referred are for the year ending 31-Mar-2017. These PCA framework guidelines would be reviewed again after 3 years.
How RBI can put restrictions on banks as per PCA framework?
RBI scrutinizes financials and various financial ratios of the bank. It would invoke PCA against any bank where it see major risks based on asset quality, profitability and capital. If Maximum tolerance limit of NPA crosses 6% and if bank has Negative returns on assets for 4 consecutive years, RBI would invoke PCA against a bank.
Why RBI has initiated PCA against Dena Bank and UCO Bank in India?
As per RBI audit, Dena Bank and UCO Bank have breached threshold 2 of the PCA, hence RBI initiated Prompt Corrective Action against these banks. As an example, Dena Banks net NPA has crossed 10.66% for the 4th Quarter of 2016-2017 and Return on Assets is -1.02% (negative) for the last year. As per PCA framework, RBI initiated PCA against Dena Bank. There are around 16 banks as on Dec-2016 which would fall under revised PCA framework. However RBI would initiate PCA only based on Mar-2017 quarter results. Hence more banks would come under radar in coming weeks.
What does it mean to Banking Industry?
Many investors felt banking industry is in danger zone after RBI initiated PCA against 2 banks. They believe some more banks would come in the RBI radar. Let us look on other side. When Net NPAs are increasing, RBI is alerting banks and putting on mandatory or discretionary restrictions. As an example, after PCA initiated for Dena Bank, they announced that they would stop their branch expansion and no additional headcount in banking staff would be done this year. Means any banks want to fool investors would be in RBI radar. This brings more attention on banking operations and they need to perform well. While we cannot rule out any banking Scams, such PCA from RBI would bring more tightening controls and help Banking industry to have health growth in India.
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Should you stay invested in your Banking Mutual Funds or Banking Stocks?
If you have invested in banking stocks and mutual funds you would get doubt whether you want to continue to invest in them. These corrective actions would help banking sector to have tighetening controls, hence you should continue to stay investing in such stocks or mutual funds.
Hats-Off RBI !!!
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What does PCA against Dena Bank and UCO Bank mean to Banking Industry