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Forced mergers, sacking on cards as RBI gets tough with misfiring big banks
May, 17th 2017

At least half a dozen state-run banks are in the line of fire as their rapidly deteriorating financials have caught the attention of the RBI, two senior bank officials have said.

Over the past one week, senior RBI officials have been meeting the top management of commercial banks to gauge their financial strength and the central bank may initiate prompt corrective action (PCA) against some of them under the newly-tightened regulatory guidelines, said the officials.

Under the new guidelines, RBI can take measures including sacking of management and forced merger of weak banks with a strong one, possibly leading to a wave of consolidation.

RBI officials are holding the meetings even before banks declared their financial results.

Senior officials from the banking circle said the discussions focus on stressed loans, capital, profits, expenses, and future plan of action. RBI did not respond to an email sent by ET.

PCA places restriction on banks in terms on lending, opening branches and even hiring as it is aimed at curbing expenses and improving asset quality of loans.

Last month, RBI issued revised framework on PCA that said banks having losses for two consecutive years, whose share of bad loans has crossed 6 per cent, and those unable to meet the minimum capital requirement, would be subject to PCA.

Among banks that have declared results for March 2017, Dena Bank and Central Bank of India have reported gross NPAs (non-performing assets) above 6 per cent and have posted losses for two consecutive years. They could be in RBI's radar, officials said.

At least 15 banks have gross nonperforming loans above 6 per cent of their total loan book. They include Canara Bank, Bank of India, Union Bank of India, Central Bank of India, Punjab National Bank, Corporation Bank, Andhra Bank, Allahabad Bank, Dena Bank, Indian Overseas Bank and Oriental Bank of Commerce.

Many banks are hopeful that they may escape PCA since they adhered to the other two criteria -minimum capital adequacy norm of 10.25 per cent and posting profits. Banking analysts said if the divergence in accounting between RBI and the bank is taken into consideration, many banks could see their capital erode as their profits would take a hit to make provisions of bad loans.

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