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RBI issues revised PCA framework for banks

  • IASbaba
  • November 5, 2021
  • 0
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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.

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