The Finance Ministry is hopeful that all banks will be out of the prompt corrective action (PCA) list by the end of June with their net NPA (non-performing asset) level coming in the range of 6 per cent by then.
The capital needs of all PCA banks have already been taken care of by the government through recapitalisation in December 2018 and January 2019.
The government took three banks - Bank of India, Bank of Maharashtra and Oriental Bank of Commerce - out of the PCA list last month.
Two others - Dena Bank (part of merger with Vijaya Bank and Bank of Baroda) and IDBI Bank (through acquisition by LIC) - will be out of the PCA list by default.
This leaves just six banks in the list of weak banks that will be under pressure from the peer group to improve on their NPA improvisation performance. They could cut down their NPA by June this year, informed sources said.
While the Bank of Baroda-Dena Bank-Vijaya Bank merged entity will start operations from April 1, 2019, the LIC-IDBI entity is in the process of starting banking operations.
LIC had in January completed the deal with IDBI bank. However, IRDAI Chairman Subhash Chandra Khuntia had stated that the approval for the LIC-IDBI Bank deal had been on the condition that the stake will eventually be brought down to 15 per cent.
The six banks which will be eyeing non-PCA status in 2019 will be Allahabad Bank, United Bank of India, Corporation Bank, UCO Bank, Central Bank of India and Indian Overseas Bank.
There is no time deadline given to any bank from the Finance Ministry. Officials say it should be their own goal to get out of PCA. They need to improve all key parameters of NPAs, capital savings and non-core assets monetisation.
All the agenda and roadmap have been given to them but they also have to realize that the sooner they get out of this framework restrictions, they will be able undertake more expansion and operations, the sources said.
Recently, the government announced infusion of Rs 28,615 crore into seven public sector banks (PSBs) through recapitalisation bonds which have raised their capital ratio and improved recovery mechanism, targeting lower net NPA level.
Some banks are performing well and they are adequately capitalised as per the Basel norms. So, capitalization and loan recovery steps will facilitate them to come out of PCA.
The PCA framework kicks in when banks breach any of the three key regulatory trigger points: capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA).
Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio, and the government and some of the independent directors of the RBI board, like S Gurumurthy, are in favour of this practice being adopted for the domestic banking sector as well.