Exit mechanism for banks under PCA crucial, says Sanjeev Sanyal

Principal economic advisor Sanjeev Sanyal Monday said the country cannot have 'Hotel California' approach towards banks under the prompt corrective action (PCA) framework, where the exit mechanism for these lenders is undefined.

The Reserve Bank of India's PCA framework, which intends to nurse financially weak banks back to health, restricts lending and expansion of lenders.

Out of the 21 state-owned banks, 11 are under the PCA framework at present.

"We cannot have a 'Hotel California' approach to PCA banks that you can check out anytime but you cannot leave. We have to have a plan on how these institutions will come out of PCA," Sanyal said referring to the Hotel California song by America's famous band Eagles.

The song talks about a person who reaches mystical Hotel California, from where the person is able to check out but unable to exit.

Speaking at the third annual event of Foreign Exchange Dealers' Association of India (Fedai) here, he said the ultimate aim should be to make sure that credit flow reaches the bottom of the system.

"Because there is no point in having this highly capitalised central bank and highly capitalised banking system, none of which supports the financial requirements lower ring of economy," he added.

The banks currently under the PCA framework are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra.