Page 46 - Banking Finance July 2024

ARTICLE

indicators to prevent further deterioration. The RBI also
issued guidelines on stressed asset resolution, loan
classification, and provisioning norms, ensuring greater
accountability and transparency in the banking sector. The
objective of the PCA framework is to enable supervisory
intervention at appropriate time and require the supervised
entity to initiate and implement remedial measures in a
timely manner, so as to restore its financial health.

The PCA framework is also intended to act as a tool for
effective market discipline. As many as 11 public sector
banks were put under the prompt corrective action
framework between 2017 and 2018 before the mega bank
method invested as much as INR 20,000 crore into PSBs in
merger exercise; these were Allahabad Bank, Bank of India, the 1990s. In 1993-95, the then UPA government introduced
Bank of Maharashtra, Central Bank of India, Corporation
Bank, Dena Bank, IDBI Bank, Indian Overseas Bank, Oriental recapitalization bonds to help distressed Indian banks.
Bank of Commerce, UCO Bank and United Bank of India. They
Introduction of the "Bad Bank" marks a significant step in
were taken out of PCA after they managed to contain net
transforming the bad loan landscape in the Indian financial
NPA below 6% and improved capital adequacy, albeit with
sector. By consolidating bad loans, leveraging specialized
the help of the government. Only Dena Bank and United expertise, and adopting efficient resolution mechanisms, the
Bank of India remained under the corrective and restrictive "Bad Bank" aims at stabilizing the banking sector, facilitating
framework when they were merged with Bank of Baroda credit flow, and reestablishing investor confidence. This
and Punjab National Bank
NARCL-IRDCL structure aims to clean off the banking
institutions' bad liabilities and help clean up the bank's
The Indian government launched a series of bank
recapitalization programs to address the capital adequacy balance sheets, strengthen banks' financials and enhance
issues faced by banks burdened with NPAs. These initiatives recovery. Indian government has proposed the creation of
infused significant capital into public sector banks, enabling a bank called the National Asset Reconstruction Company
Limited (NARCL) or "Bad Bank" to tackle the issue of bad
them to write off NPAs and extend credit to productive
loans in the banking system. The proposed NARCL aims to
sectors of the economy. The recapitalization efforts have
acquire and manage stressed assets from public sector banks
played a crucial role in strengthening the financial health of and facilitate their resolution.
banks and improving their ability to tackle the NPA problem.
The central government invested Rs 3.31 lakh crore in public
sector banks between FY 2017 and FY 2021 but is yet to do Beacon of Hope
so since due to the institutions' steadily improving financial Gross non-performing assets (NPAs) of Indian banks are
condition. As of December 31, 2022, all PSBs have more expected to fall to a decade low of 4 per cent by the end of
than a 100-basis point cushion above the regulatory Tier I fiscal 2023-24 from a peak of 11.5 per cent in March 2018,
capital requirement. helped by a sharp improvement in the corporate segment,
even though an industry study showed that the stressed
It is 10.8% for SBI, 12.6% for Bank of Baroda, 13.7% for loans to MSMEs are projected to remain elevated. NPAs in
Canara Bank, 11.6% for UCO Bank, 12.3% for Union Bank, the corporate segment are estimated to fall to 2 per cent
and 13.5% for Bank of Maharashtra, and 13.6 per cent for by the end of fiscal 2023-24 from a peak of 16 per cent as
Bank of India. Capital infusion into the banks, started in India on March 31, 2018, according to a study conducted jointly
in the 1990s when the Indian economy was on a downward by industry body Assocham and CRISIL Ratings.
growth trajectory. However, because of the trade-off
between the fiscal deficit and the extent of capital infusion, For banks, gross NPAs are expected to decline by 90 basis
there has been a limit to how much the Centre can infuse points (bps) year-on-year to 5 per cent this fiscal, and by
from the state coffers. According to media reports, this another 100 bps to a low of 4 per cent by March 31, 2024,

42 | 2024 | JULY | BANKING FINANCE