Hello and welcome to exampundit. In the recent days, we have seen the term PCA or Prompt Corrective Action for Banks by RBI. We have seen Dena Bank, Bank of Maharashtra under Prompt Corrective Actions which restricted them from lending fresh loans & dividends.
So, we decided to provide a PDF on all about the Prompt Corrective Action for Banks By RBI as a part of our Banking Awareness 2017 series.
Prompt Corrective Action for Banks By RBI
PCA is applicable to All Scheduled Commercial Banks (Excluding Regional Rural Banks).
The salient features of revised PCA Framework for Banks
- Capital, asset quality and profitability continue to be the key areas for monitoring in the revised framework.
- Indicators to be tracked for Capital, asset quality and profitability would be CRAR/ Common Equity Tier I ratio1, Net NPA ratio2 and Return on Assets3 respectively.
- Leverage would be monitored additionally as part of the PCA framework.
- Breach of any risk threshold (as detailed under) would result in invocation of PCA.
What is Prompt Corrective Action (PCA)?
PCA norms allow the regulator to place certain restrictions such as halting branch expansion and stopping dividend payment.
It can even cap a bank’s lending limit to one entity or sector. Other corrective action that can be imposed on banks include special audit, restructuring operations and activation of recovery plan. Banks’ promoters can be asked to bring in new management, too.
The RBI can also supersede the bank’s board, under PCA.
RBI, in April, had issued a new set of enabling provisions under the revised PCA framework with a clause that if the bank does not show improvement then it could be either be merged or taken be over by other bank.
The provisions of the revised PCA framework will be effective April 1, 2017 based on the financials of the banks for the year ended March 31, 2017. The framework will be reviewed after three years.