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Revised framework of PCA

 

Revised framework of PCA: Relevance

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Revised framework of PCA: Context

  • Recently, RBI has announced a revised Prompt Corrective Action (PCA) framework for banks to enable supervisory intervention at an “appropriate time” and also act as a tool for effective market discipline.

 

Revised framework of PCA_40.1

 

Revised framework of PCA: Key points

Financial Stability and Development Council

Revised provisions

  • The revised PCA framework will be applicable from January 1, 2022.
  • Under the revised framework, return on assets as a parameter has been excluded which may trigger action under the framework.
  • Payments banks and small finance banks (SFBs) have also been removed from the list of lenders where prompt corrective action can be initiated.
  • Revised PCA framework RBI key areas: Under the revised PCA framework, indicators to be tracked for capital, asset quality and leverage would be CRAR/ common equity tier I ratio, net NPA ratio and tier I leverage ratio, respectively.
  • In governance related actions, the RBI can supersede the board under Banking Regulation Act, 1949.

 

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PCA will apply to?

  • The framework will apply to all banks operating in India, including foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.

 

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When shall a bank come under PCA?

  • A bank will generally be placed under PCA framework based on the audited annual financial results and the ongoing supervisory assessment made by the RBI.

 

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About PCA

  • The PCA framework was first introduced in December 2002 as a structured early intervention mechanism.
  • These regulations were later revised in April 2017.
  • RBI uses PCA framework to rein in banks that have breached certain regulatory thresholds in bad loans and capital adequacy.
  • PCA entails curbs on high-risk lending, setting aside more money on provisions and restrictions on management salary.

 

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