RBI recently released the revised PCA framework (13th April 2017). An evaluation of all the PSU banks, including SBI, shows an alarming 16 of these banks who have breached the Risk Threshold status in one or more parameters. 8 of them are in 2nd level breach while 1 is in 3rd level breach. A few more are breathing down the breach levels!!!
The current revision of RBI primarily includes ‘Leverage Ratio’ as a new parameter for PCA evaluation and also lists down the ‘Mandatory Actions’ for each threshold level breach.
Let us recap the PCA (prompt corrective action) framework first:
We evaluated SBI & the PSBs along with a few private sector banks (HDFC, KMB, ICICI & Axis) just for sake of comparison.
Following table illustrates their current position (based on Q3 FY17 data):
- 9 banks have already breached Level 1, 6 Level 2 & IOB the lone one in Level 3.
- Some of them have breached in multiple PCA parameters. While Net NPA is one of the most breached parameter, a few banks have breached in ROA as well (IDBI, BOI, Allahabad, Dena, IOB) and
- Select few in Capital ratio as well along with ROA & NNPA (Central Bank of India, UCO Bank). Pls. note that the ROA is as of FY17 Q3 annualized.
- The situation is going to become more challenging with RBI asking banks to provide more for bad sectors irrespective of individual loan performance. The notification says: “banks are encouraged to make provisions at higher rates in respect of advances to stressed sectors of the economy”. This will put additional constraint on the capital position of the banks.
The details for each bank is provided below as reference. We can safely summarize that we are looking at a very risky state of the PSU banking ecosystem. So many of them in bad status indicates some inherently major issues within the PSBs sector which may have to do with bad banking oversight or bad management or political/ banking corruption & so on. Otherwise despite some pressure on the banking ecosystem, one can not explain such a high concentration of ‘bad apples’ in one place. One can argue that PSB has social causes to espouse which has led to this but then NPA’s has been badly hit in corporate sector loans.
Going forward, we are looking at consolidation of the banking space in PSB. Some of the smaller banks, especially those which have breached PCA levels, may be ideal candidates for consolidation with larger PSB. But we are not sure whether that will solve the inherent challenges which have pushed the PSBs to this state. Even if we consider SBI, BOB, PNB, they are not exactly in a bright state in themselves. SBI NPA is going to shoot up post merger, PNB is already in in Level 2 breach of NPA while BOB is also hit by bad loans.
- RBI Revised PCA notification: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10921&Mode=0
- RBI Revised Provisioning Norm: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10931&Mode=0
- Banks financial quarter results, Basel III disclosures, analyst reports