UPSC Articles
RBI issues revised PCA framework for banks
Part of: Prelims and GS III – Economy
Context The RBI has issued a revised Prompt Corrective Action (PCA) framework for banks to enable supervisory intervention and act as a tool for effective market discipline.
About the revised framework:
- The revised PCA framework will be effective from January 1, 2022.
- Earlier three parameters for monitoring were Capital (Capital Adequacy Ratio), Asset Quality (NPA) and Return on Assets (profit).
- Now the three parameters are Capital (Capital Adequacy Ratio), Asset Quality (NPA) and Leverage (equity capital/total assets of bank).
- Earlier PCA framework was applicable on all Scheduled Commercial Banks except Regional Rural Banks.
- Now it is applicable on all Scheduled Commercial Banks except Regional Rural Banks, Payment Banks and Small Finance Banks.
What is Prompt Corrective Action (PCA)?
- Prompt Corrective Action (PCA) is a supervisory framework of RBI where it uses various measures/tools to maintain sound financial health of banks.
- Once these parameters cross a certain level RBI puts the bank under PCA. And then it can take discretionary actions against the bank.
Once a bank comes under PCA framework, what actions RBI can take on the bank?
- RBI can put restrictions on Branch expansion, distributing dividends, capping compensation and fees of management and directors.
- In extreme cases, banks may be stopped from lending and there can be a cap on lending to specific sectors/entities.
- May increase the provisioning requirement for banks
- Steps can be taken to bring in new management/Board, appoint consultants for organizational structuring, change of ownership, merger of the bank.
