Rediff.com  » Business » RBI plans to put weak private lenders under the hammer

RBI plans to put weak private lenders under the hammer

By Somesh Jha
January 16, 2020 22:34 IST

The banking regulator is seeking an early exit mechanism for private banks under Prompt Corrective Action.

In a first, the Reserve Bank of India (RBI) is planning to auction private sector banks that have been suffering from poor financial health for a prolonged period.

This is part of the RBI’s plan to adopt a differentiated regulatory regime for public and private banks under the Prompt Corrective Action (PCA) framework.

 

The banking regulator is seeking an early exit mechanism for private banks under PCA.

One measure it is exploring is to auction these banks, said an RBI executive, requesting anonymity.

“Private banks cannot remain under the PCA framework forever. If the promoters are unable to revive the bank for a long period of time, the RBI may look to auction the assets, liabilities, and operations of the bank,” the executive said.

At present, there are six lenders under the RBI’s PCA framework that includes two private banks - IDBI Bank and Lakshmi Vilas Bank.

While IDBI Bank came under the PCA in May 2017, Lakshmi Vilas Bank followed suit in September 2019.

To date, the RBI has adopted the merger route to address the fragile health of private banks.

In the last such instance, the RBI had put a moratorium on the erstwhile United Western Bank in September 2006, in view of its poor capital base.

Following this, 17 entities had submitted an expression of interest and the RBI decided to merge UWB with IDBI, after imposing a month’s restrictions on operations.

In 2004 too, it had merged private lender Global Trust Bank with state-owned Oriental Bank of Commerce after imposing a three-month moratorium.

However, no weak private bank has been auctioned so far.

“The regulator is empowered to do so under existing laws.

"Earlier, the RBI would use its discretion to address the fragile health of private banks through forceful mergers.

"But it didn’t include a plan to auction banks.

"This seems to be a progressive approach followed by the RBI, as the shareholders will be able to extract the best value out of the failing bank.

"It’s good for the system,” said Ashvin Parekh, managing partner at consulting firm Ashvin Parekh Advisory Services.

The Federal Deposit Insurance Corporation, an independent agency in the US with the mandate to look into bank resolution, auctions failing financial institutions to healthy banks.

There are a few projects that have received momentary relief through central government schemes of providing a coal- or power-sale agreement.

In the past two years, the Ministries of Coal and Power started two schemes for reviving stressed assets.

Under the SHAKTI scheme for supplying coal to stressed projects, eight benefited.

The Union power ministry did one round of bidding for medium-term power purchase agreements for assets that don’t have any sale agreement.

There were six projects that received an interest from four states to buy power for three years at Rs 4.24 per unit.

In June last year, the RBI issued a “Prudential Framework for Resolution of Stressed Assets”, replacing all its earlier circulars, including the one in February, which directed banks to treat one-day payment failure as a default and initiate insolvency proceedings.

The RBI’s norms direct banks to resolve NPAs through debt restructuring and sales of assets, failing which the assets face insolvency at the NCLT.

Photograph: Francis Mascarenhas/Reuters

Somesh Jha in New Delhi
Source: source
SHARE THIS STORY