Big steps taken by the government to improve the condition of banks

Why in the discussion?

The government has proposed to increase the bank recapitalization outlay to public sector banks from Rs 65,000 crores in current financial year to Rs 1,06,000 crores. In view of the role of public sector banks in the development of the country, more capital will be provided to strengthen the banking sector. With this, adequate capital will be given to banks, which are performing well to exit the Prompt Corrective Action (PCA).

What is the Prompt Corrective Action (PCA)?


The Reserve Bank of India has the license to license the banks. The Reserve Bank only makes the rules and monitors the bank to work properly. Banks are often trapped in financial crisis while doing business. To bail out banks from this crisis, the Reserve Bank issues guidelines from time to time and creates the framework. Prompt Corrective Action – PCA is a similar framework, which determines the financial health of a bank. This Framework is running from December 2002 with changes made from time to time. It is also applicable to small banks including all commercial banks and foreign banks opening branches in India.
When the Reserve Bank thinks that a bank does not have enough capital to face the risk, if the borrowed money is not getting income and neither is making profits, then that bank will put it in the Prompt Corrective Action Framework. So that it can be done immediately to improve his financial condition. To find out the financial health of a bank, the Reserve Bank has set some parameters, including Capital to Risk Asset Ratio (CRAR), Net NPA and Return on Assets.

11 government banks are under the supervision of the Reserve Bank

As we have said, the Reserve Bank has created the Prompt Corrective Action Framework to maintain financial health of banks. Its purpose is to encourage the banks to focus on capital protection to abandon some risky activities, improve operational efficiency and strengthen them. The purpose of this framework is not to disrupt the normal functioning of banks for the general public. Reserve Bank prompt Corrective Action Framework for Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank and United Bank of India Is kept under

Why is being given and capital?

  • To meet regulatory standards related to capital.
  • Providing capital to better performing banks, so that they can maintain a 9% capital-risk weighted asset ratio (CRAR).
  • Apart from this, facilitating the capital protection buffer of 1.875% and private banks in the event of violation of certain limitations of net NPAs of 6%, so that they can avoid infringement.
  • Strengthen the merger banks by providing regulatory and development capital.

Concept of 4R

Under the 4R concept of the government, after adjusting the system with a comprehensive change in the banking system, by providing more capital to the banks, they will become financially better in terms of global standards than the global standards. These 4R are as follows …
  1. Recognition

  3. Resolution (Solution)

  5. Recapitalization (Recapitalization)

  7. Reform

How Irresponsive Are 4R?

  • Gross NPAs of public sector banks have come down after reaching a high level in March, 2018. During the first half of the current financial year, there has been a decrease of Rs 23,860 crore.
  • Non-payment non-NPA accounts of 61 percent of the public sector banks have recorded a decrease of 61 percent during the 5 consecutive quarters for 31 to 90 days.
  • It has come down from Rs 2.25 lakh crore in June 2017 to Rs 0.87 lakh crore in September, 2018. There is a considerable reduction in the risks of this risk.
  • Provision coverage ratio of public sector banks has increased from 46.04 percent in March 2015 to 66.85 percent in September, 2018. This has led to an increase in the capacity of banks related to losses.
  • In the first half of the current financial year, PSB has recorded a record recovery of Rs 60,726 crore, which is more than twice the amount of recovery during the same period last year.

‘Rainbow 2.0’ scheme and Basel III rule


For public sector banks, the government started the Rainbow 2.0 scheme in 2015. This scheme is an overall program for recapitalization of public sector banks, which helps banks maintain their capital status under Basel-III rules.
The central government believes that instead of the current stringent guidelines for capital adequacy in the banks, the Reserve Bank should keep them in line with the capital adequacy rules related to Basel III. Due to the stringent rules of the Reserve Bank, banks have to keep more capital aside for capital adequacy.
According to the Basel Committee’s Banking Inspection Report, the Reserve Bank has kept the original capital requirement for banks one percent more than Basel-III rules. Indian banks have to keep share equity tier-1 at 5.5 percent, while it should be 4.5 percent under Basel-III rules. This report says that due to the high capital adequacy rules, banks need additional capital, which affects their ability to pay debts and increase the income.
In the year 2018-19, the government had announced a capital infusion of 65 thousand crores in government banks. Of this, capital of 23 thousand crores has already been deposited and 42 thousand crores remain. Now the Government has sought the approval of Parliament in relation to the additional capital of Rs. 41 thousand crores besides the said amount. Thus, in the remaining months of the current financial year, the capital inflicted in public sector banks will increase to 83 thousand crores.
The Finance Minister believes that since capitalization will be done in banks, it will not have any impact on the fiscal deficit target. The Government expects that 4 to 5 banks will come out of the Prompt Corrective Action Framework after meeting the capital requirements of the banks with this extra capital.

Source: Indian Express, PIB

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