RBI board considers future course for weaker banks

MUMBAI: Should weaker banks hold back lending and expansion until they are completely out of the woods? Or is there a better chance of improving their finances if the regulator allows them to lend and grow? The question arose at last week’s meeting on the main board of Indian Reserve Bank (RBI) – with opinions from directors divided on the matter.

Five banks – Central Bank of India, IDBI Bank, Indian Overseas Bank, Uco Bank and Lakshmi Vilas Bank – is now undergoing rapid corrective action by the RBI (PCA) frame that brings in several restrictions with the aim of preserving banks’ capital and improving their capacity to absorb losses. The edges are only lifted according to new directives from the regulator.

“Some (board) members felt that a delay in lifting the restrictions could prolong the recovery of these banks after Covid. Instead, the RBI should let them hire and chase business. It was a general discussion … members had different views and no decision was made. The case is likely to be referred to BFS, ”said one person who was aware of the discussion. (The Board of Financial Supervisors or the BFS performs consolidated supervision of the financial sector consisting of commercial banks, financial institutions and non-bank finance companies).

In addition to prohibiting the payment of dividends and restricting the expansion of branches and compensation to management under the PCA, the RBI has discretion to stop banks from lending to lower-grade companies and to hire.

A spokesman for the RBI declined to comment on the board discussion of the PCA.

Only the capital-strong Lakshmi Vilas Bank is doing better than the other four and is back in the black. IDBI, IOB and Uco have their net defaulted assets below 6%, which is the regulatory tolerance level below the PCA framework. These banks’ capital adequacy levels have also increased after the government’s capital injection. Although it has given a positive return on assets, net NPA the relationship between Central Bank of India is 6.76%. Central Bank and IOB announced their second quarter results on 6 November.

“Some in the industry feel that a bank loses good customers, float (or current account) and fee and cash handling business if there are restrictions on regular activities. Also, low credit growth can make the NPA ratio look higher. With Covid, the moratorium on loan interest and repayment, it is unclear what bank numbers will look like in the next few quarters, ”said one banker.