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.
