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Explained: RBI bars Dena Bank from lending loans and hiring staff

May 14, 2018 13:41 IST
RBI bars Dena Bank from lending loans and hiring staff under PCA

Taking into account the high Non-Performing Assets (NPAs), the Reserve Bank of India (RBI) on May 11, 2018 ordered the Dena Bank Ltd to not to issue any fresh loans and hire any new personnel.

The move restricts the bank from giving fresh credits; however, it can accept the deposits.

Why RBI took such stringent move?

The move is a part of the RBI’s prompt corrective action against public sector lender Dena Bank in view of its high non-performing loans. The RBI initiated Prompt Corrective Action (PCA) for Dena Bank in May 2017 and imposed certain restrictions on the bank.

Dena Bank’s weak financials

• The public sector lender on May 11, 2018 reported a further widening of its net loss to Rs 1225.42 crore in the March-ended quarter due to mounting bad loans and higher provisioning. In the previous quarter, the loss was Rs 380.1 crore.

• The bank’s gross NPAs had hit a high of 22.4 percent, out of the gross advances as on March 31, 2018. The figure was 16.27 percent in 2017. The bank reported three consecutive years of negative Return on Assets (RoA) with net NPA more than 9 percent.

• In value terms, the gross bad loans rose to Rs 16361.4 crore and the Net NPA ratio was also grew to 11.95 percent from 10.66 percent in 2017.

• Only on capital front, the bank has not breached any risk threshold with 11.09 percent Capital Adequacy Ratio and 8.81 percent common equity tier-I capital.

RBI's corrective action against other banks


• At present, out of 21 state-owned banks, there are 11 banks under the PCA framework of the Reserve Bank because of their weak financials.

• Together, these banks accounted for Rs 52311 crore of the capital infusion plan ‘EASE’ of Rs 88139 crore, announced by the Union Government for 2017-18.

• Recently, the RBI initiated the Prompt Corrective Action (PCA) mechanism against four other public sector banks, including Allahabad Bank, IDBI Bank Ltd, Indian Overseas Bank and UCO Bank.

11 banks on the RBI's watchlist

Allahabad Bank

Bank of India

United Bank of India

Central Bank of India

Corporation Bank

Oriental Bank of Commerce

IDBI Bank

Indian Overseas Bank

Bank of Maharashtra

Dena Bank

UCO Bank

 

Point to Remember

Though all these banks are being scrutinised under the PCA framework, it’s only the Dena Bank that has been barred from fresh lending.

About the Prompt Corrective Action (PCA) of the RBI

• Under the PCA, banks face restrictions on distributing dividends and remitting profits.

• In such cases in India, the government is asked to infuse capital into the lender.

• Banks could also be stopped from expanding their branch networks.

• Lenders are directed to maintain higher provisions and management compensation; and limit the directors’ fees.

• The metrics that are used to measure how weak a lender is, are - capital, net NPAs, Return on Assets (RoA) and Tier 1 leverage ratio and these metrics define the three risk thresholds according to which RBI implement the action plan.

• Banks under PCA can fall into three risk thresholds based on the level of bad loans, capital adequacy and profitability.

• In April 2017, the RBI had issued a new set of provisions under the revised PCA framework, adding a clause that if a bank does not show improvement or if it reaches the level of ‘risk threshold 3’, then it could either be merged or be taken over by other bank.

RBI’s Corrective Action on banks based on risk thresholds level

Risk Threshold 1

Risk Threshold 2

Risk Threshold 3

Restriction on dividends

Restriction on dividends

Restriction on dividends

Discretionary actions

Discretionary actions

Discretionary actions

 

Higher provisions

Restriction on branch expansion

 

Restriction on branch expansion

Restriction on management compensation

 

 

Restriction on director’ fee

Union Government’s reform agenda EASE

• In January 2018, the Union Government had announced its Enhanced Access and Service Excellence (EASE) reform agenda under which banks are needed to set up specialised monitoring agencies for loans above 250 crore.

• Banks are required to set up a separate vertical for non-performing assets (NPAs), apart from selling non-core assets and rationalising overseas businesses.

• Banks also need to have a minimum 10 percent exposure in consortium loans to prevent a situation in which too many lenders are involved when it comes to debt resolution.

• The reform agenda focuses on six themes - customer responsiveness, responsible banking, credit offtake, PSBs as Udyami Mitra, deepening financial inclusion and digitalisation.

Is RBI stressing on the need of ‘Narrow Banking’ in face of Prompt Corrective Action?

Though RBI has not clearly stated, but its Prompt Corrective Action mechanism seems like that of the Narrow Banking itself.

The ‘Narrow Banking’ concept involves separation of the deposit and lending functions of a bank, wherein, banks can only accept deposits and cannot issue any fresh loans or credits. However, the concept of Narrow Banking appears to be unacceptable to the authorities.

Narrow Banks

Offer only deposit services

Reduce chances of taking risks for weak banks

Deploy incremental resources as investments in government securities

However, lead to sharp decline in profitability

In 1997, the Tarpore Committee on Capital Account Convertibility recommended that weak banks with high NPAs should be converted into narrow banks.

However, contrary to the committee’s recommendations, economists Saibal Ghosh and Mridul Saggar, in their 1998 research paper, claimed that though narrow banking could be a feasible proposition for banks with high NPAs, however, implementing such a concept in a developing economy like India could be costly and could lead to a sharp decline in profitability significantly.

 

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