Reserve Bank of India (RBI) has initiate a prompt corrective action or PCA on Oct 5 against Oriental Bank of Commerce due to high bad loans. This move of RBI will impose certain restriction on banking business activities of OBC which has suffered huge loss due to sudden rise in non performing assets (NPA).
OBC – 7th Bank under RBI’s Prompt Corrective Action
Oriental Bank of Commerce (OBC) has became 7th bank to be placed under prompt corrective action by RBI. There will be restriction on the bank in terms of Branches expansion, fresh recruitment and lending to investment grade companies.
“The Reserve Bank of India…has put the Bank under Prompt Corrective Action in view of high Net NPA (non- performing asset),” the OBC said in a regulatory filing. It, however, added that the action will not have “any material impact” on the performance of the bank and will contribute in overall improvement in its risk management, asset quality, profitability and efficiency.
What is Prompt Corrective Action (PCA)
Prompt Corrective Action is imposed by RBI on Banks when thresholds limits related to capital , asset quality and earnings are breached.
The RBI in April had issued a new set of enabling provisions under the revised PCA framework with a clause that if the bank does not show improvement then it could be either be merged or taken over by other bank.
RBI has initiated similar action against other public sector banks including IDBI Bank, Dena Bank, Central Bank of India, Bank of Maharashtra, Indian Overseas Bank and UCO Bank. The move will place various restrictions on the public sector lender including on fresh loans and dividend distribution. Net NPA of the bank rose to 9.56% of net advances as of June against 8.11% a year ago.
Oriental Bank of Commerce had reported a net loss of Rs486.20 crore for the first quarter ended June due to lower income and higher provisioning for bad loans. Its gross NPAs rose to 14.83% of gross advances, as against 11.45% year ago.
The rise in bad loans proportion led to higher provisioning of Rs1,591.48 crore for the quarter ended June as against Rs 1,147.49 crore in the year-ago period.
Oriental Bank of Commerce’s shares had traded last at Rs123.50 a piece on BSE on Friday, up 1.31% over previous close.
The RBI has, in the past clarified that banks are placed under PCA to facilitate them to take corrective measures to restore their financial health. Reserve Bank pays focussed attention on such banks by engaging with the management closely in certain areas of concern.