Banks with unsound financials face chances of a merger or winding up, also risks of their board and management being sacked by the Reserve Bank of India. The RBI, last week, came out with a revised set of 'prompt corrective action', steps to get failed banks back on the track. While the PCA have been around since 2002, the RBI reset the trigger points.
Norms dictate that the RBI gets into action when the capital adequacy sinks below a certain level or when bad loans rise beyond a certain point. There are different corrective actions for each milestone. RBI said that a shortfall of the common equity tier I capital by 3.625 per cent from prescribed limits “would identify a bank as a likely candidate for resolution through tools like amalgamation, reconstruction, or winding up.” The current minimum requirement of common equity tier I capital is 6.75 per cent.
Under the new trigger points, banks with net non-performing assets between 6 per cent and 9 per cent will face restrictions on dividend payments with promoters being asked to bring in more capital. Those with net NPAs between 9 per cent and 12 per cent would not be allowed to expand branches. Banks that breach the third level of NPAs will face restrictions on management compensation as well.