RBI issues stricter guidelines to cut down bad loans

In an attempt to cut down bad loans in the economy, the Reserve Bank of India has issued a new set of guidelines under the 'prompt corrective action (PCA)' on April 13, 2017. The apex bank stated that the capital, asset quality and profitability will be evaluated on the basis of the PCA framework, on which the banks will be monitored. The bank established three kinds of risk thresholds under PCA, whose breach will call for action.

The RBI is also expected to keep a strict watch on weak banks' expansion strategies and promoter compensation. The banks with net NPAs between 6 to 9 per cent of their total loan book and with negative return on assets for a period of two years will face restrictions on dividend and profit remittances according to the PCA.

While, banks with a net NPA between 9 and 12 per cent and with negative returns for a period of three years will face restrictions on branch expansions.

Furthermore, banks with the net NPA of more than 12 per cent and a negative return on assets for four consecutive years will be subject to restrictions on management's compensation and in extreme cases might even lead to closure of the banks.