More PSU banks to be added under PCA plan

The Reserve Bank of India (RBI) is likely to add more 6 PSU banks under promt corrective action (PCA). PNB, Union Bank of India and Syndicate bank are likely to be among the 6 to be added. However the final order on 6 banks have not yet been announced.

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Why is this important

PCA framework is one of such supervisory tools, which involves monitoring of certain performance indicators of the banks as an early warning exercise and is initiated once such thresholds as relating to capital, asset quality etc. are breached. Its objective is to facilitate the banks to take corrective measures including those prescribed by the Reserve Bank, in a timely manner, in order to restore financial health of the bank. The framework also provides an opportunity to the Reserve Bank to pay focussed attention on such banks by engaging with the management more closely in those areas. A bank’s ability to lend money comes under severe pressure once it is put under PCA framework.

Also, if large lenders like PNB are put under PCA, it will halt RBI’s plan to set up a consortium of banks that will take over good loans of banks under PCA.

Stock to be impacted

The news is unfavorable for PSU banks particularly PNB (CMP: Rs 92, M.cap: Rs 25562 cr, 0.5x FY20 P/BV)  and Union Bank of India (CMP: Rs 96. M.cap: Rs 11265 cr, 0.4x FY20E P/BV).

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