22/12/2018 - Indian Economy

KEY POINTS

Reserve Bank of India (RBI) has issued a Prompt Corrective Action (PCA) framework to maintain the sound financial health of banks. It facilitates banks in breach of risk thresholds for identified areas of monitoring, viz., capital, asset quality (which is tracked in terms of the net Non-Performing Assets ratio) and profitability, to take corrective measures in a timely manner, improve operational efficiency and focus on conserving capital to strengthen them.

Recapitalizing PCA banks is not a good idea(increasing NPA)

·        Capital infusion into PCA banks suggests it is attempting to boost loan growth by empowering weaker lenders (improper distribution of financial resources).

·        Even after the clean-up of PCA banks, many of them continue to post large losses—IDBI Bank for instance. It is apparent that lending processes at these lenders are not up to the mark.

·        The government has been eager to dilute the PCA framework by reducing the number of metrics, rather than three metrics—capital, NPAs, and profits—it wants only capital to be considered.

·        Each time bailing out using taxpayers money affects the financial health of the government.

 Recapitalizing PCA banks, a good idea(reducing NPA)

·        Provides an opportunity for weak banks to reorient their strategy of issuing loans and reducing NPAs in a long-term plan.

·        Enable strengthening the banking system as PCA banks are crucial in providing loans to smaller and medium enterprises, also help cleaning bank balance sheets.

·        Bailing out the private banks will enable participation of private sector in investments especially in infrastructure(retrieval of loans by banks depends on the nature of investment models proposed by the government).

Please review 

Kindly review.thanks