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The Reserve Bank of India (RBI) has tightened the thresholds for capital ratios, NPLs, profitability and leverage - at which banks enter the "prompt corrective action" (PCA) framework.
The move could suggest a greater willingness to take regulatory action to address problems at struggling banks, but its implementation is only likely to be effective if it is matched by credible plans to address banks' significant asset quality issues and capital shortages, says Fitch Ratings.
RBI's strengthening of tools appears to be an acknowledgement of the significant asset quality stress in the system and that more banks are in need of regulatory intervention. PCA was previously viewed as an extraordinary step, which the RBI urged banks to make great efforts to avoid.
The scope for possible regulatory actions has been broadened under the amended framework, but it remains uncertain to what extent the RBI will use the tools it has just made available. The RBI may use the PCA framework to identify weak banks as candidates for mergers.
