Why RBI put BOI under PCA framework (Reason)

The Reserve Bank of India (RBI) has placed Bank of India under its ‘prompt corrective action’ (PCA) framework due to the bank’s high non-performing assets (NPAs), insufficient common equity tier 1 capital (CET 1) and negative return on assets (ROA), the Mumbai-based public sector lender said on Wednesday. The decision was taken consequent to the onsite inspection under the risk-based supervision model carried out for FY17, Bank of India said in a notice to stock exchanges. 


“This is in view of high net NPA, insufficient CET 1 Capital and negative ROA for two consecutive years. This action will contribute to the overall improvement in risk management, asset quality, profitability and efficiency of the bank,” the filing said. The PCA framework places restrictions on dividend distribution and remittance of profits, branch expansion and management compensation, depending on the risk threshold. It also calls for higher provisioning coverage and makes it mandatory for the promoters or owners to infuse capital into a bank.



If a bank’s CET 1 capital ratio is between 5.13% and 6.75%, its net NPA is between 6% and 9% and its ROA has been negative for two consecutive year, it falls under the Risk Threshold 1 category. If the net NPA ratio worsens to between 9% and 12% and the CET 1 capital ratio deteriorates to between 5.13% and 3.63% , it falls under the Risk Threshold 2 category. If the net NPA ratio breaches 12% and the CET 1 capital falls below 3.63%, it falls under the Risk Threshold 3 category. At the end of FY17, Bank of India’s CET 1 capital ratio fell to 7.17% from 7.97% in the year-ago period. Its net NPA ratio stood at 6.90%, compared with 7.79% a year ago. The bank reported ROA of -0.24% and -0.94% in FY17 and FY16, respectively. However, Bank of India’s net NPA ratio improved to 6.47% in the second quarter of FY18 and it reported ROA of 0.11%. The CET 1 capital ratio was 7.21% during the quarter.

Bank of India is the ninth bank to be placed under the PCA framework. Earlier this year, the RBI had placed similar restrictions on Corporation Bank, Oriental Bank of Commerce, Dena Bank, Central Bank of India, IDBI Bank, Indian Overseas Bank, Bank of Maharashtra and UCO Bank. At the announcement of the September quarter results, Bank of India MD and CEO Dinabandhu Mohapatra had said the lender had made provisions for 65% of NPAs. 

“As far as our non-performing assets are concerned, if there are no unexpected or unwarranted developments, definitely our progress will be very steady,” Mohapatra had added. The objective of the PCA framework is to facilitate the banks to take corrective measures including those prescribed by the RBI, in a timely manner, in order to restore the banks’ financial health. 

The RBI had clarified that the PCA framework is not intended to constrain normal operations of the banks or services to the general public. Anil Gupta, vice-president and sector head, financial ratings, Icra, said the impact of the restrictions on declaring dividend or expanding the branch network has been limited because many of the banks have been reporting losses and had no significant plans of adding new branches. 

On the capital front, the government’s Rs 2.11-lakh-crore recapitalisation programme is likely to help the banks to improve their capital adequacy ratio and provide for a larger share of NPAs, he added. Icra estimates that the net NPA ratio of banks is likely to improve to around 4.4% by March 2018 from about 5.8% in September.



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