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May 15, 2017

RBI hastens clean-up of bank balance sheets

The Reserve Bank of India (RBI) has, in April 2017, announced a series of measures that should structurally improve India’s banking system by hastening a clean-up of balance sheets, strengthening credit discipline, and catalysing consolidation.

Mandatory public disclosure of deviation between reported non-performing assets (NPAs) and provisions compared with the RBI’s assessment, increase in standard asset provisioning on exposures to vulnerable sectors, and revision in the prompt corrective action (PCA) framework for banks are aimed at enhancing transparency and ensuring adequate recognition of stress in the loan books of banks.

Additionally, tightening of risk thresholds under PCA based on capitalization, asset quality, profitability and leverage levels will help in devising effective resolutions for banks to address systemic issues. Banks breaching the risk thresholds 1 and 2 will be subject to mandatory and discretionary corrective actions. For breach of risk threshold 1 and 2, actions can include mandatory capital infusion, restriction on dividend payouts and branch expansions and increased provisioning requirements. However, banks that breach threshold 3 with regards to common equity capital, could face more severe implications including their merger/winding-up/reconstruction. These measures will help in early resolution of issues within banks and hence are positive from a long-term sustainability perspective.