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MOSL: FINANCIALS-RBI’s Prompt Correct Action Framework-Emerging ray of hope!

Financials: RBI’s Prompt Correct Action Framework: Emerging ray of hope!

 

The Prompt Corrective Action (PCA) framework has limited banking abilities of 11 PSU banks, which collectively forms 17.7% of systemic advances as on 2QFY19. Recently, there has been a debate between Government and the RBI about the need and efficacy of this framework. In this note we have analysed the performance of 11 PSU banks under PCA over past few years based on various operational parameters and benchmarked them on key PCA criterias. We have followed it up with our assessment of total capital requirement of PCA banks and likely candidates to come out of this framework. Following are the key takeaways:

• 2-year Advances/Deposits CAGR for PCA banks collectively stood at -4.4%/-0.3%, (b) PCA banks saw loan/deposit market share erosion of 540bp/347bp since 2QFY17, (c) RWA/total assets for PCA banks declined by 778bp to 53% currently, (d) Cumulative losses of these banks since FY16 stands at INR1.03t, (e) GNPA/NNPA ratio for PCA banks increased by 441bp/106bp (since FY17) to 20.5%/10.9%, respectively, (f) CASA mix for all PCA banks barring IOB has improved, and (f) Proportion of retail loans for PCA banks has increased sharply.
• While PCA banks have received INR588b since Jan’18; we estimate further capital requirement of ~INR469b for these banks to achieve 9% CET-1. The government has recently announced infusion of INR270b for six banks out of 11 PCA banks.
• Based on our analysis we believe that Allahabad Bank, Bank of India, Bank of Maharashtra, Corporation Bank, and Oriental Bank of Commerce stand a better chance to come out of the PCA framework. This will help ease the flow of credit to the MSME sector, which has been muted for the last couple of years.