IDBI out of PCA Framework

In its recent notification, the Reserve Bank of India (RBI) has taken IDBI bank out of the Prompt Corrective Action (PCA) framework. This is good news for the banking sector in general. It clearly means that the financial position of IDBI bank has improved enough to be taken out of the PCA framework. A bank is put under the PCA framework of RBI on the basis of three parameters namely capital to risk weighted assets ratio (CRAR), net non-performing assets (NPA) and Return on Assets (RoA). When these key ratios fall below the trigger points As per the RBI press release, for the quarter ending on 31st December 2020, the bank has been found to be not in breach of the PCA parameters on regulatory capital, net NPA and leverage ratio.

Considering the gross as well as the net NPA that the bank had before it was brought under PCA framework, the bank was under enormous strain. Also it is expected that the numbers relating to non-performing assets are bound to increase in coming days for every bank due to insolvencies and bankruptcies arising during the post COVID period. This will further be increased by the Supreme Court’s order of 3rd September 2020 about not recognizing bad loans post 31 August 2020. This order has already artificially kept the NPA numbers lower than the real numbers. So the RBI must ensure that the private lender keeps on improving its financial position and doesn't take uncalled for lending risks in the process of competing with other lenders.

The whole banking system across the global is facing a bleak financial reality and in case of India, the prospects are even darker considering the kind of shock from which the economy had to suffer due to the most stringent lockdown in the world. However the RBI is expected to continuously monitor such banks. At present, it is imperative to practice caution considering that Indian economy is going to witness a storm of NPA in the next few quarters.

Rajeev Upadhyay

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