The exit of Bank of India, Bank of Maharashtra and Oriental Bank of Commerce from the RBI’s prompt corrective action (PCA) framework is credit positive, Moody’s Investors Service said on Thursday.
The banks’ net non-performing loan (NPL) ratios and capital — two of the four parameters that the Reserve Bank of India (RBI) tracks as part of the PCA framework — improved significantly in the quarter ended December 2018, it said.
“On January 31, the Reserve Bank of India announced it had removed Bank of India (BoI), Bank of Maharashtra (BoM) and Oriental Bank of Commerce (OBC) from its PCA plan after the three public sector banks improved their asset quality and capital, a credit positive,” Moody’s said in a statement.
Exiting the PCA will remove some of the lending restrictions, which the PCA plan imposed, on these banks. However, we do not expect the banks’ loan growth to rebound significantly as they are likely to focus on repairing their balance sheets and conserving capital, Moody’s added.
The banks continue to breach the profitability parameter of the framework, but we expect this to improve gradually, helped by a decline in credit costs. The banks are already in compliance with the leverage ratio parameter.
The government’s December 2018 capital injections into the banks Rs 10,100 crore into BoI, Rs 4,500 crore into BoM and Rs 5,500 crore into OBC was a key driver in the banks’ improvement.
“The capital injections helped the banks significantly increase their loan loss coverage and reduced their net NPL ratios below the trigger point for PCA inclusion,” Moody’s said.
Of the total 21 state-owned banks, 11 were put under the PCA framework by the RBI last year.
Eight public sector banks — Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Central Bank of India, Indian Overseas Bank and Dena Bank — continue to remain subject to the plan.
The PCA framework kicks in when banks breach any of the four key regulatory trigger points namely capital-to-risk weighted assets ratio, net non-performing assets, return on assets (profitability), and leverage ratio.