Fitch Ratings, the international ratings agency in its latest report has said that more than half of the country’s Public Sector Banks (PSBs) can be impacted by the Reserve Bank of India’s (RBI) revised Prompt Corrective Action (PCA) framework and they would breach at least one of the new thresholds, primarily due to high non-performing loans (NPLs).
The report stated that the RBI's PCA framework suggests a greater willingness to regulatory action to address problems of struggling banks. However, it noted that the implementation of the new rules is only expected to be effective if it is matched by credible plans to address banks' significant asset quality issues and capital shortages. The report underscored that the central bank has tightened the thresholds for capital ratios, NPLs, profitability and leverage at which banks enter the PCA framework. It also said that this appears to be an acknowledgement of stressed assets and that more banks need regulatory intervention. It observed that the RBI has given itself greater discretion in terms of the measures it can use to intervene in banks once they fall under the PCA framework.
Fitch further said that PCA was previously viewed as an extraordinary step which the central bank avoided but the same is set to change now. It also noted that under the previous framework, the central bank’s powers were restricted to bank lending but the scope for possible regulatory actions has been broadened under the amended framework and added that it remains uncertain to what extent the RBI will use the tools.