A Reserve Bank of India notification on March 10 conveyed glad tidings for IDBI Bank: it was being removed from the RBI's prompt corrective action (PCA) framework after being in it since May 2017.
The nearly four-year long imposition of the framework on the bank ends after the RBI found that the banks financial parameters warranted its exit from the same.
"It was noted that as per published results for the quarter ending December 31, 2020 the bank is not in breach of the PCA parameters on regulatory capital, Net NPA and Leverage ratio.", said the RBI. Further, the bank said it had given a written commitment that it would abide by the regulatory requirements for these parameters. "Taking all the above into consideration, it has been decided that IDBI Bank Limited be taken out of the PCA framework, subject to certain conditions and continuous monitoring", it said.
This leaves only three public sector banks - Central Bank of India, UCO Bank, and Indian Overseas Banks - remains in this framework.
Here's what the PCA, and how IDBI Bank was put under it.
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What is the PCA?
The PCA are an overarching set of measures that may be imposed by the RBI on a bank. The imposition of the frameworks allows the RBI to inhibit or guide the overall functioning of a bank to reduce the stress on its balance sheet.
Based on capital adequacy, leverage, asset quality and profitability of the bank, the RBI has divided the PCA framework into three risk thresholds, each carrying a set of mandatory measures that banks have to implement if they're placed under the PCA under that threshold.
- Risk threshold one: The RBI can impose restrictions on dividend distribution of the bank, or remittance on profits in case of a foreign bank. Further, the promoters/owners/parent in case of a foreign bank may be required to bring in additional capital.
- Risk threshold two: Alongside the mandatory measures of the first threshold, the RBI can prohibit branch expansion or expansion abroad, and it can ask the bank to make more provisions
- Risk threshold three: With the mandatory measures of the first threshold, the RBI can prohibit branch expansion or expansion abroad, and curtail compensation to directors or management of the bank.
Across all thresholds, the RBI may also issue guidelines pertaining to a bank's strategy, governance, profitability, credit and market risk, lending, human resources and operations.
IDBI Bank was placed under the PCA in 2017, when it had a net NPA ratio of 9.61% as of December 2016, and negative return on assets under risk threshold two.
Read more about the parameters and risk tiers here.
Which under banks saw itself previously under the PCA?
Numerous government-controlled banks have been under the PCA at various stages, with as many as seven of them (including IDBI Bank) being placed under the PCA in 2017 alone.
- Central Bank of India, which is still under PCA, was put under the framework in June 2017, but after three quarters of profits, could be looking at leaving it.
- Bank of India, that was placed under PCA in December 2017, but was out of it on January 31, 2019, along with the Bank of Maharashtra and Oriental Bank of Commerce (which got merged into Punjab National Bank).
- The erstwhile Dena Bank was placed under the PCA mid-2017, but was removed from it as its merger with the Bank of Baroda fructified in April 2019.
- UCO Bank is yet under PCA, which was imposed on it in May 2017
- India Overseas Bank was placed under the PCA in October 2015, and still remains under it.
IDBI Bank's share prices ended 9.80%(₹3.75) higher on the National Stock Exchange at ₹42.
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