Mumbai: Some PSU banks may face harsher measures from the RBI under the prompt corrective action (PCA) framework, with their performance deteriorating further in the fourth quarter of 2017-18.

The possibility of 4-5 more lenders coming under the mechanism is also not being ruled out.

The RBI monitors three areas under PCA - capital, asset quality and profitability. These comprise CRAR, or common equity tier-I (CET1) ratio, which is the percentage of core equity capital net of regulatory requirements to total risk weighted assets; net NPA ratio (percentage of net NPAs to net advances); and return on assets (the percentage of net profit to average total assets).

The apex bank has set three risk thresholds under these three heads and the breach of any threshold can bring a bank under prompt corrective action.

Banks under PCA face restrictions on dividend distribution, opening up of branches, hiring staff and management compensation. The RBI can also ask a particular bank not to take fresh credit exposure. If a bank breaches "risk threshold 3" of CET1, the banking regulator can identify it as a likely candidate for resolution through tools such as amalgamation, reconstruction or winding up.

At present, 11 of the 21 state-owned banks are under PCA. These include IDBI Bank, United Bank, Allahabad Bank, Uco Bank, Corporation Bank, Indian Overseas Bank and Bank of India..

However, with many of the PSU banks continuing to disappoint in the January-March quarter, analysts are not ruling out the possibility of the RBI taking more stringent action in the existing cases, apart from bringing more banks under the PCA net.

A note from Edelweiss Securities said five more banks could be vulnerable to PCA in the near term - Punjab National Bank, Canara Bank, Union Bank, Andhra Bank and Punjab & Sind Bank.

"While the PSU banks continue to dominate the Indian banking sector with around 67 per cent market share, their positioning is at risk, given that currently 20 per cent of the market accounted for by 11 banks are already under PCA, with further 16 per cent (five more) vulnerable to the PCA in the near term. The deteriorating financials suggest that some of the banks could transition to higher RT amid further restrictions," the note said.

"Going by what happened to Dena and Allahabad Bank recently, we expect eight more banks to potentially face lending constraints (cumulatively form more than 20 per cent of market)," the note added.

PNB, which recently declared record non-performing assets, posted net NPAs of 11.2 per cent. It had a CET-1 ratio of 5.96 per cent. Under RBI norms, a bank will come under risk threshold-1 (RT1) if the CET1 ratio is 5.12-6.75 per cent. Its NPAs are also come within the RT-2 where PCA is invoked if net NPAs come between 9-12 per cent.

The lending restrictions on some these banks could be good news to their private sector peers as they can now look forward to improve their market share. The leading private sector banks have in the recent past indicated that they will focus on top rated corporates apart from retail loans. With PSU banks battling their own set of challenges (apart from lending restrictions imposed on some of them under PCA), it is felt that the private sector lenders can look forward to a better loan growth than their PSU counterparts.