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    Government, NBFCs ask RBI to dilute PCA rules: Here is what experts have to say

    finance | IST

    Government, NBFCs ask RBI to dilute PCA rules: Here is what experts have to say

    The government and nonbanking finance companies (NBFC) on Monday put the pressure on the Reserve Bank of India and asked it to dilute the prompt corrective action (PCA) framework under which loss-making banks have been stopped from lending, said people familiar with the matter. Finance ministry and RBI officials are likely to meet soon to examine the PCA rule, sources privy to the matter told CNBC-TV18. Housing finance companies (HFC), NBFCs and debt funds said that the current debt squeeze is due to PCA but the bankers denied this argument and blamed lack of capital for lower loan growth.
    In an exclusive interview to CNBC-TV18, Ashvin Parekh, managing partner, Ashvin Parekh Advisory Service said that the regulator should continue to be a little strict on this subject. Pawan Kumar Bajaj, former MD, United Bank of India said banks don’t have the capital and that is why they are not able to lend.
    Edited Excerpts:
    What is your sense, the PCA rules are fairly strict if capital falls below 7.75 percent and if NPAs are above 9 percent then banks are told that you are under PCA and you can’t lend to companies which are rated A and below. Do you think this should be diluted now?
    Parekh: I am subscribing to the view that the regulator should continue to be a little strict on this subject. I have a strong reason for that. There are three aspects that the regulator and its February circular had talked about before it really started becoming strict on this entire subject.
    The first thing it had mentioned was that the monitoring at the banking system wasn’t really up to the required standards, particularly the public sector banking and then it did say that the recovery had not really been of the order that the regulator had thought about way back in October last year. Not last year, in fact, it all started in 2016. So to that extent, I must say that since the recovery of these banks, the one under the PCA has not demonstrated a high order of recovery.
    One is not only talking about large accounts where there is exposure, but one is also talking about the mid-size and small size let us say units where the recovery is an issue. Then it really takes us through a point with lack of recovery and strong evidence of monitoring should the regulator really sort of open up this environment again. That is the question that keeps coming to my mind.
    Would you blame the fact that 10 PSU banks are under PCA for the liquidity crunch in the debt market?
    Bajaj: They don’t have the capital, so they are not able to lend.
    You mean there is no capital and that is why they are not lending?
    Bajaj: Yes, it is not a liquidity problem because most of the banks have liquid but if you lend you have to provide capital and banks doesn’t have that kind of capital.
    Within the amount, they can lend, have banks gone slow because of risk aversion or have they lent to their limit?
    Bajaj: Particularly to any sector, there are exposure norms and risk appetite of particular banks are there as per the board has driven policy and beyond that you cannot do so.
    In a particular segment if you want to do more, then the risk factor will come and banks do not go beyond a particular limit. As you know, particularly group exposure, single borrow concept, those kind of things are also there, so, banks depending upon their net-worth they lend to a particular sector and a particular industry.
    RBI old timers, not so old timers, just retired people as well, worry that if you allow the prompt corrective action (PCA) list banks to now go away from this compulsory lending only to A and above companies, at a time like this when a lot of NBFCs and housing finance companies are keen to sell-off their loans to somebody, chances are there will be political pressure on the banks to help out because it is becoming a systemic problem and the RBI is in a better position to take the stress. Individual bank MDs cannot and therefore the RBI should not relent. This is the argument I got from some RBI old timers. Fair point?
    Parekh: The way I look at on this subject particularly is that there has to be a demonstrable change in the banking approach, in the governance framework. So if the same set of pressures continue, if the same set of behavioural challenges that the banks face of immediately succumbing to pressures, then, in that case, we would have not really done any justice to a lot of discipline that the regulator and the government both wanted to put about.
    I think the government also has been able to instill that kind of discipline through the MoUs with the banking companies. So in that regard, both of them would have really failed I would say. Of course, one is looking at it from growth and the other is looking at it from the stability point of view, but I am not seeing visible signs of change in the governance approach of the banking companies particularly as such.
    Would you worry that if this condition that only A+ companies should be lent to as a condition is removed, public sector banks may end up buying some of the toxic loans or I would say some of the risky loans of NBFCs and housing finance companies?
    Bajaj: Even earlier also banks were taking NBFC exposure of high rated companies like AA, AAA rated. Below A, BBB, I do not think even earlier PCA banks or other banks were taking much exposure on that kind of companies. Below BBB, risk weight comes to the picture on the high side and AA, AAA with risk exposure is only up to 30 percent. So in that case, if risk exposure is limited to 30 percent, bank can think of and in many NBFC cases some loans are there and repayments are also taking place.
    Then that is the different rule you are asking? You are saying that for certain loans RBI should reduce the risk weightage?
    Bajaj: Even if they do so that will again problem comes because as you know right now NBFCs are also facing problems and if their NPA levels go high then it will impact the banks also.
    You have long been a foreign exchange dealer as well, you were head of the foreign exchange association when you were in Bank of India. How will foreign investors look at it if under pressure from the government the PCA rules are diluted? Can it have a negative impact on the foreign perception of the Indian banking sector?
    Bajaj: Definitely, if you are diluting the things that will have some negative impact that is not sticking to the thing that we want to improve the overall position of the PCA banks particular.
    What should the government do? They want someone to lend to the HFCs and give some line of credit to housing finance companies and NBFCs. At the current juncture, the private sector banks are way to savvy they are not going to pick up bad assets if they do they will cherry pick the good ones and the public sector banks most of them are in PCA only State Bank of India, Bank of Baroda and few others are left, what are the options at all before the government?
    Parekh: Let us look at this, the government can take this as an opportunity I believe. What could be done with the regulator is that to evolve a certain mechanism of rating the NBFCs in a slightly different manner, just focus more on a future cash flows and create a little tighter mechanism or a proper mechanism so that there is no concentration of risk. At the same time the promise of Rs 50,000 crore that the regulator talked about a couple of days ago can actually flow into the system and then it can have a certain amount of growth impact.
    Basically capitalise the banks quickly?
    Parekh: Yes, capitalise the banks quickly and also offer them a new framework for evaluating particularly the exposure to NBFCs and take it as a short-term, medium-term and a long-term kind of a framework. So, that at least the money starts flowing, the problem that is there in the economy gets a little eased out. But at the same time make sure that it doesn’t become a permanent method of funding the NBFCs.
    What about the suggestion that is coming from various quarters that RBI should have tighter regulations of NBFCs and HFCs? For instance, none of these entities declared their restructured loans. For all you know they are evergreened more than the banks have but they don’t declare it. So do an AQR of HFCs and NBFCs then you know who is good and then the system will trust those who are trustworthy?
    Parekh: I would certainly believe that the new structure must address this particular part. The amount of disclosure that the NBFCs must have to the financial lenders that in itself needs to be evaluated. IL&FS is only one of the examples and that was infrastructure financing. In the case of housing, we know that there are underlying mismatches between liability and the assets.
    So I suppose if the framework were to address this issue of disclosure also I mean that the borrowers must provide to the financial lenders it could strengthen the whole thing. I know that the RBI as a regulator the NBFCs do not have a strong sort of framework kind of mechanism as they have for the banking, I am only comparing it with the banking but I suppose it will have to be better evolved basically.
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