The Reserve Bank of India (RBI) has put Bank of India under its prompt corrective action (PCA) after a huge spike in bad loans. RBI has been placing these restrictions on various public sector banks in the country after bad loans surged across the country. Bank of India’s non-performing assets (NPA) were reported to be 6% for the last two years.
Following this news, shares of Bank of India tumbled in the stock exchange declining by about 5%. The bank revealed that this action was taken in lieu of high NPAs, insufficient capital, and negative return on investment for the past two years. This represents the ninth such action taken by RBI over the last 10 months against public sector banks.
PCAs are typically initiated against banks that have poor asset quality, low profitability, and inadequate capital ratio. Initiation of PCA will impose various restrictions on a bank. Banks that face this scrutiny cannot open new branches, hire new staff, or provide salary hikes to existing staff. Most importantly, these banks can only lend money to companies that have high investment grades.
Bad loans are turning into a major issue for banks across the country. The finance ministry revealed last week that bad loans in public sector banks have crossed Rs.8.5 lakh crore in the first half of the current fiscal year. Insolvency proceedings have already been initiated against 12 major accounts in the country. The government and RBI are now looking for ways to bring down NPAs through swift insolvency proceedings.
A week ago, RBI initiated a similar action against Corporation Bank after its NPAs crossed 10%. As of now, some of the other banks facing this action include Dena Bank, IDBI Bank, Indian Overseas Bank, Oriental Bank of Commerce, Bank of Maharashtra, UCO Bank, and Central Bank of India. Internal performance of these banks will not be affected because of this action, and they will continue to operate under the restrictions set forth by RBI.