The Reserve Bank of India (RBI) did not just write a detailed letter, it also made a presentation to the Ministry of Finance before rolling out the stricter standards for Prompt Corrective Action (PCA) in April 2017, said people familiar with these developments. .
At the time, the Ministry of Finance had responded to the central bank stating that it was "generally in agreement" with the framework proposed by the RBI.
"The ministry had also asked for clarification on a particular point, to which RBI had responded. After that, there was no more response from the ministry, "said one of the people aware of the exchange.
The government has requested a relaxation of the standards applicable to these banks so that they can grant more loans. The question was raised, among other things, in a series of letters from the Ministry of Finance to the Central Bank in October.
In these letters, the Ministry of Finance allegedly invoked Article 7 of the Banking Regulation Act (RBI), they said.
"The letters invoked Part (1) of Section 7, which states that instructions may be given to the RBI, but not Part (2) of the same section, which refers to the formation of a board central administration, "they said. .
Article 7 (2) of the RBI Act provides that, subject to such instructions, the general supervision and direction of the affairs of the RBI shall be entrusted to a central board of directors which may "exercise all the powers and do all the things that can be done or done by the RBI. "
The PCA was launched in eleven state-owned banks. Their share of advances and deposits at March 31, 2018 was 18.5% and 20.8%, respectively.
In a recent speech, the RBI's deputy governor, Viral Acharya, observed that despite a lower capitalization and a lower asset ratio than other banks , credit growth of the banks of the APC was as strong as that of the other banks until 2014.
However, since the AQR exercise and the imposition of the PCA, the year-over-year growth in PCA bank advances has grown from more than 10% in 2014 to a value below zero (contraction) in 2016 and has been in the contraction zone ever since.
Acharya pointed out that the persistent problem of asset quality among these lenders persisted: "This is indeed the drug needed to prevent further haemorrhage of their balance sheets."
Given that the asset quality of many of these lenders continues to decline, it may be necessary to inject a lot of regulatory capital and growth capital before they can begin to lend more, industry experts said. While tightening PCA standards in April 2017, the RBI continued to make capital quality and profitability the primary predictor of the leverage ratio that can be monitored.
The government has injected more than 2.3 million crowns into public service obligations since 2005, more than half of which went to banks currently covered by the CPA. In the PCA banks, almost half of the total infusion, 63,500 crores, occurred during Exercises 18 and 19, after the banks were placed in the PCA category.
Acharya said the recapitalization had contributed significantly to the financial stability of these banks and the rest of the banking system they were dealing with.
In 2014, United Bank of India became the first bank for which the PCA was launched. Two more were added in 2015 and another eight underperforming banks in 2017. Allahabad Bank was added to the list in January 2018.