The Reserve Bank of India has increased its curbs on banks to tackle capital shortfall and bad loans. In a statement issued on Thursday, the Central bank said its prompt corrective action regulations will monitor lenders based on three factors – capital ratios, asset quality and profitability.
At least 16 banks face penalties including restrictions on lending and expansion plans from the RBI if they are found guilty of violating the regulations, Mint reported on Friday. The curbs could also attract a change in management and decrease in assets.
Banks across the country are grappling with bad loans up to Rs 7 trillion and several lenders are facing a capital shortfall. The apex bank has set a capital-to-risk assets ratio at a minimum of 10.25% from the earlier 9%.
The bank has also said violators would face closure or mergers and awarded itself the discretionary power to decide on the bank’s future. Until December 2016, Dhanlaxmi Bank and Central Bank of India were the only lenders which had a capital adequacy ratio of less than 10%.
“The PCA framework is nothing new. In the backdrop of Basel (capital adequacy) norms incrementally going to be tighter, RBI is using this tool to finally intervene in the banks. This tool will assist in guiding banks to faster non-performing asset resolution which, if left to their own, is only going to get delayed,” Mint quoted Fitch Ratings Director Saswata Guha as saying.
The apex bank set a maximum net on non-performing ratios at 6% to maintain asset quality. By December 2016, 16 commercial banks had over 6% in net NPA ratio. Indian Overseas Bank had the highest net NPA ratio at 14.32%.
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