The Reserve Bank of India, as part of the prompt correction action scheme finalised on Monday, has empowered itself to merge or even liquidate any bank that operates with less than 3 per cent capital adequacy ratio.
The central bank can also impose moratorium on a bank if its CAR does not improve beyond 3 per cent within a year or within such extended period as agreed to. Both Indian Bank and Nedungadi Bank fall in this category. Indian Bank's CAR is 1.7 per cent and Nedungadi Bank -1.99 per cent.
Similarly, if the net non-performing assets are above 15 per cent, banks will be banned from entering into new lines of business. They will also be required to skip dividend payments. Besides, they will not be allowed to increase stakes in subsidiaries.
To start with, the scheme, finalised with the approval of the Board for Financial Supervision and the Centre, will be in force for a year and will be reviewed in December 2003.
The RBI has directed banks to place the scheme before their boards and ensure that they do not come within the PCA framework. The PCA, however, does not preclude the RBI from taking any other actions.
There are certain trigger points in terms of CAR, net non-performing assets and return on assets and those banks, which cross these points will be subjected to the PCA.
In case, the CAR goes down below 6 per cent and more than 3 per cent, the RBI and the government will step in to change the management. The promoters or owners can also be changed.
Even merger can be considered in case the bank fails to submit the recapitalisation plan within a specified timeframe. Centurion Bank falls in this category.
Those banks which have CAR less than 9 per cent but more than 6 per cent will be banned from expanding assets, entering new lines of business and renewal of costly deposits. These banks will also required to skip dividends.
RBI, at its discretion, may order recapitalisation, cap its stake in subsidiaries and reduce exposures to sensitive sectors. These banks can also be barred from borrowings from the inter-bank market.
In case the net NPA is over 10 per cent but less than 15 per cent, the banks will be required to undertake special drive to reduce the stock of NPAs and contain generation of fresh NPAs. It will also will review its loan policy by reducing loan concentration to individuals, groups, sectors and specific industries.
It will not be allowed to enter into new lines of business, skip dividend payments and not increase its stake in subsidiaries.
If the RoA is less than 0.25 per cent, banks will be banned from entering into new lines of business. There will be restrictions on its borrowing from the inter-bank market too. Besides, it will be asked to cut administrative expenses and skip dividend payouts.
The banks in this category will also be directed not to incur any capital expenditure other than for technological upgradation and not to recruit staff. In this category fall Dena Bank (0.06 per cent), Indian Bank (0.13 per cent), Punjab & Sind Bank (0.17 per cent), Nedungadi Bank (0.08 per cent) and Centurion bank (-3.27 per cent).