Few banks under RBI's prompt corrective action can expect relief soon, as the central bank's Board of Financial Supervision (BFS) will meet on Jan 31st to review the restrictions on banks under PCA. As per one RBI source privy to the matter, “Initially 3-4 banks may get relief from lending and other restrictions based on capital position and NPAs”. The BFS is expected to share its views to central board of Reserve Bank which will meet on  9th February and will be chaired by finance minister. So the announcement is expected around mid February. 

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As per sources, Banks like Bank of Maharashtra, Bank of India and Corporation Bank may come out of PCA in the first list. Under PCA framework, banks are directed to preserve the capital and lending, expansion and even new hiring is not allowed. 

Government wants RBI to end restrictions on banks under PCA, as it believes many sectors are not getting enough funding, which is impacting the economic activity. Government has also reiterated that capital infusion should not be a problem and will be provided as per requirement to banks.

To provide relief to banks, RBI recently extended the timeline to implement last tranche of 0.625% of 2.5% mandatory Capital Conservation Buffer by one year. Earlier it was to be implemented by March 2019, now banks have time to comply till March 2020. 

As per Basel 3 norms, banks are required to maintain Capital Conservation Buffer of 2.5% of their risk weighted assets. Capital Conservation Buffer is Capital Buffer that banks are required to accumulate so it can be used in times of stress.

Currently, there are 11 PSBs along with one private sector bank Dhanlaxmi Bank under the PCA framework. RBI issued new framework of PCA in April 2017. 

RBI imposes restrictions as per PCA framework, CRAR, NPA, Return on Asset and Leverage Ratio are the primary criteria for the same.

Government wants PSU Banks to come out of PCA because of two main reasons; Firstly, more banks will be able to lend to industry which will help in creating more economic activity, and Secondly, once the smaller banks under PCA are stabilized, it will help the government to implement initial idea of merger of smaller PSU banks to create few big banks. 

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The bigger banks are not keen to merge the weaker ones as it increases liability on them and also government is forced every year to infuse more capital. In the past three years, government has infused close to Rs 1,23,000 Cr from tax payers money in PSU banks and most of it has been absorbed into losses.

By: Brajesh Kumar