Page 27 - Banking Finance August 2020

ARTICLE

Banks (UCBs). Since SAF is in the larger interest of UCBs, it Revised SAF Guidelines:
becomes necessary to create awareness of the recent
SAF is more effective in bringing about the desired
revised SAF introduced in January 2020. Towards this end, improvement in the financial health of UCBs as also
the present article shares the relevant information. To begin
expeditious resolution of UCBs experiencing financial stress .
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with, let us examine features of SAF.
The latest RBI Circular of January 06, 2020 discusses the
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revised the SAF . There are three triggers which include:
Features of SAF: (i) Asset Quality when Net NPAs exceed 6% of Net Advances.
RBI conducts inspection of UCBs under the provisions of the (ii) Profitability when there are losses for two consecutive
Banking Regulation Act, 1949 to assess the financial position financial years and there are accumulated losses on its
of a bank and its adherence to the various provisions of the balance sheet. And, (iii) Capital to Risk Weighted Assets
Act and directions/instructions issued there under. It also Ratio (CRAR) when it falls below 9%.
monitors the financial position of UCBs based on periodical
returns/statements submitted by them. Further, the Reserve For each trigger, there are certain Common actions which
Bank initiates supervisory actions based on its assessment should be taken by the UCB which shall include; a) Advising
of the financial position of a bank. The SAF envisages, in the the UCB to submit a Board-approved Action Plan for each
initial stage of deterioration in the financial position, self trigger b) Advising the Board of Directors of the UCB to
corrective action by the management of UCBs themselves review the progress under the Action Plan on quarterly/
and, thereafter, supervisory action by the Reserve Bank in monthly basis, and c) Advising the UCB to submit the post-
case the financial position of the bank does not improve. review progress report to Reserve Bank.

For supervisory action by RBI, there are certain trigger Besides Common actions, there are certain trigger-wise
points which indicate the deterioration in the financial Specific Supervisory actions taken by the RBI. To elaborate,
position of a bank. Such deterioration in financial shall refer for (i) Asset Quality trigger, such specific supervisory actions
to fall in the asset quality, decline in profits, capital include: a) UCB would be required to furnish an action plan
inadequacy etc. As stated earlier, the management of the for recovery of NPAs and to undertake special drive to reduce
UCB should first identify the cause of deterioration and take the stock of NPAs and contain generation of fresh NPAs. b)
necessary corrective actions, on their own, with a view to The Board of the UCB would review its loan policy, take steps
improve the financial position of the bank. to upgrade credit appraisal skills and strengthen follow-up
of advances including loan recovery; c) Curtailment of
But, such corrective action should be prompt as any delay sanction/renewal of credit facilities to sectors/segments
could be detrimental to the interest of the depositors and having high proportion of NPAs; d) Reduction in exposure
other stake holders of the bank. The corrective action should limits for fresh loans and advances; and, e) Restriction on
include measures for augmenting capital, close monitoring fresh loans and advances carrying risk-weights of more than
of NPAs and their recovery, improving profitability by 100%.
curtailing expenses, mobilizing low cost deposits etc. The
UCBs should also prepare a time bound specific action plan Similarly for (ii) Profitability trigger, additional specific
for bringing about necessary improvement in its overall supervisory actions include: a) The UCB is advised not to
functioning and, the Board of Directors should monitor the access/renew high cost deposits, launch special drive to
progress in implementation of the action plan in its every reduce the stock of NPAs & contain generation of fresh NPAs,
meeting. rationalize its branches and close down loss making
branches; b) Prohibition on declaration/payment of dividend/
In case necessary steps are not taken to improve their donation; c) Restriction on incurring capital expenditure
financials or steps taken do not result in the required beyond a specified limit, without prior approval of the
improvement in the financial position of the bank, the Reserve Bank and, d) Measures for reduction in interest and
Reserve Bank steps in and initiate supervisory actions as it operating / administrative expenses.
deems necessary RBI revises guidelines on SAF from time to
time to address issues arising in its implementation. Lastly, for (iii) CRAR trigger, supervisory actions include: a)

BANKING FINANCE | AUGUST | 2020 | 27