The RBI has been keeping a strict eye the situation at the Dhanlaxmi bank after the bank delayed capital raising plans and a section of shareholders of the bank have called for an extraordinary general meeting to suspend powers of the managing director and CEO of the bank.
In order to address substantial deteriorations in its financial status, Dhanlaxmi Bank was even included in the RBI's prompt corrective action framework (PCA) since its capital adequacy had previously dropped below necessary levels.
However, a major question arises with this,
When is a bank placed under the supervision?
The RBI has established regulatory trigger points for three parameters: net non-performing assets (NPA), return on assets (RoA) and capital-to-risk-weighted assets (CRAR).
Any loan or advance for which the principle or interest payment was past due for 90 days is classified as an NPA. If net NPAs exceed 10% but fall short of 15%, a special initiative to decrease defaulted loans and stop the creation of new NPAs is launched.
RoA is a particular kind of profitability ratio that gauges an organization's or financial institution's returns on its assets. The RBI prohibits the bank from opening up new lines of business if RoA is less than 0.25%.
In order to help banks safeguard their depositors and promote financial health, the CRAR ratio assesses a bank's financial stability by calculating its available capital as a proportion of its risk-weighted credit exposure.
Why is CRAR important?
According to Basel-III standards, banks must keep their capital to risk-weighted assets ratio (CRAR) at 9% or above. The CRAR of Dhanlaxmi Bank decreased from 14.5% to roughly 13% at the end of March this year, leading the RBI to evaluate the bank's financial situation.
The weight attributed to the asset's value for determining the bank's capital adequacy ratio is larger for riskier asset types maintained on a bank's balance sheet. As a result, the bank's capital adequacy ratio declines, indicating a larger risk of collapse during crises.
It is a gauge of a bank's capacity to continue operating even if it experiences severe losses on its loan book. If the total value of a bank's assets falls below the total value of its liabilities, the bank cannot continue to exist since its capital would be destroyed and it would become insolvent.
The management of Dhanlaxmi Bank has also come under fire from its minority shareholders for deciding to extend the bank into new regions despite an unforeseen rise in costs. The administration has furthermore been charged with refusing to provide sufficient justification for the expense rise.
In the past also, several banks were placed under PCA framework for RBI monitoring.
|Name of the bank||Date when monitoring began||Date when monitoring ended||Outcome|
|Central Bank||June 2017||September 2022||Improvements in a number of indicators|
|Indian Overseas Bank||October 2015||September 2021||Improvement in financial and credit profile|
|UCO Bank||May 2017||September 2021||Abiding its regulatory capital, bad loan, or leverage ratio requirements|
|IDBI Bank||May 2017||March 2021||Improvements in financial indicators|
|Oriental Bank of Commerce||October 2017||January 2019||The bank has reduced its net NPAs to less than 6% owing to significant capital injection from the government|
|Bank of Maharashtra||June 2017||January 2019||Had net NPAs of less than 6% and satisfied regulatory standards, including the capital conservation buffer|
Apart from the above mentioned names, several banks including Dena Bank, Allahabad Bank, United Bank of India have also been placed under the radar of RBI in the past.
In the upcoming months, the RBI is expected to maintain a close check on Dhanlaxmi Bank due to the bank's difficulty meeting capital adequacy standards. Dhanlaxmi Bank has tried to use a rights issue to issue more shares in the open market in order to solve its capital adequacy problems.
If the bank's capacity to easily comply with the capital adequacy standards advised by Basel-III rules is threatened by the postponement of the rights offering, the RBI may even decide to interfere.