Under the Prompt Correction Action(PCA), the RBI has thrust restriction on further two public sector lenders apart from Dena Bank, in the background of aggregating Non-performing Assets(NPAs). Strictly restricting the issue of fresh loans and hiring of new personnel, the RBI has given its ultimatum, putting a leash on Dena Bank.
The RBI are using different quantifications like the capital of the lender, the NPAs, the Return on Assets and Tier 1 leverage ratio to quantify the amount of restrictions to be imposed on a particular bank, in accordance to the revised rules of the PCA.
There is a high risk of a few more public sector lenders to face the muse if their quarterly numbers show a definite loss of capital clubbed with no net increase in their Non-performing assets. Out of 21 public sector banks under the surveillance, 11 are already included under the PCA, the number of which may increase in the near future.
According to the revised PCA, If a bank enters 'Risk threshold 3’ it is either to be amalgamated, reconstructed from the scratch or even dissolved.
Under the restrictions, the banks are not allowed to expand their branch network, distribute their dividends and profits. With a capping on the director’s fee, the banks are required to manage higher facilities with management compensation.
To avoid massive unpaid debts in the future, a stress on operational effectiveness, portfolio diversification and lending money to small-scale and medium sized, low risk enterprises has been laid.