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RBI puts restriction on IDBI Bank as Prompt Corrective Action

Reserve Bank of India has invoked ‘Prompt Corrective Action’ (PCA) on IDBI Bank. The PCA has been invoked by RBI due to IDBI Bank’s increasing NPAs and negative Return on Assets.

IDBI Bank’s net NPAs increased to 9.61% in the December 2016 quarter from 8.32% during September 2016 quarter. The annualized return on assets for the quarter ending December 2016 was (-2.32) percent.

Under PCA, restriction are put on the bank from hiring, opening branches and giving big ticket loans.
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RBI has framed a ‘Prompt Corrective Action (PCA) Framework for Banks’ which was revised by RBI in April 2017. In this PCA, indicators tracked by RBI are Capital, asset quality, profitability, CRAR/ Common Equity Tier I ratio, Net NPA ratio and Return on Assets.

There are certain risk threshold for each area (indicator), which can range from Risk Threshold 1 to 3 depending upon the severity of risk. Based on the risk threshold, RBI takes some mandatory actions and also may take the discretionary actions.

According to moneycontrol.com, Dena Bank may also face the restrictions under ‘Prompt Corrective Action’ by RBI, as it has also breached the risk threshold 2 in net NPA ratio. Net NPA Ratio of Dena Bank for the quarter ending December 2016 was 9.52%.

For example if NPA ratio is between 6%-9%, this is within Risk Threshold 1, if it is 9%-12%, this is within risk threshold 2 and if more than 12%, this is within risk threshold 3.

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Following is matrix of mandatory actions and Discretionary actions which RBI takes on breach of risk threshold by banks as part of Prompt Corrective Action.

Specifications	Mandatory actions	Discretionary actions
Risk Threshold 1	Restriction on dividend distribution/remittance of profits. Promoters/owners/parent in the case of foreign banks to bring in capital	Common menu Special Supervisory Interactions Strategy related Governance related Capital related Credit risk related Market risk related HR related Profitability related Operations related Any other
Risk Threshold 2	In addition to mandatory actions of Threshold 1, Restriction on branch expansion; domestic and/or overseas Higher provisions as part of the coverage regime
Risk Threshold 3	In addition to mandatory actions of Threshold 1, Restriction on branch expansion; domestic and/or overseas Restriction on management compensation and directors’ fees, as applicable