Daily News Analysis » Prompt Corrective Action Framework

Prompt Corrective Action Framework

The Reserve Bank of India (RBI) removed the Central Bank of India from its Prompt Corrective Action Framework (PCAF).

Why in the News?

The Reserve Bank of India (RBI) removed the Central Bank of India from its Prompt Corrective Action Framework (PCAF).

Key Points:

About

PCA Framework

  • It was introduced in 2002 as a structured early intervention mechanism along the lines of the US Federal Deposit Insurance Corporation’s PCA framework. 
  • Under the PCA framework, Banks that show weak financial parameters are put under watch by the Reserve Bank of India.
  • Basically, It helps alert the regulator as well as investors and depositors if a bank is heading for trouble i.e. Non-Performing Assets (NPAs).
  • The idea behind PCA is to proactively solve problems before they attain crisis proportions.
  • It acts as a tool for effective market discipline. 
  • It is applicable to all banks operating in India, including foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.
  • Key Monitoring Areas: Capital, asset quality and leverage 

What curbs do Banks face under the PCA?

  • Banks move from risk thresholds 1 through 3 with increasing restrictions if they are unable to arrest deterioration.
  • First, Banks face curbs on dividend distribution/remittance of profits. For foreign banks, promoters are to bring in capital.
  • In the second category, Banks additionally face curbs on branch expansion. 
  • In the final category, the Bank additionally faces restrictions on capital expenditure with some exemptions.
  • Further, the RBI also has the option of discretionary actions across strategy, governance, credit risk, market risk and human resources.

Revised PCA Framework:

  • Applicable From- January 1, 2022.
  • The revised notification has removed return on assets as an indicator to qualify for PCA. 
  • Difference between 2017 & 2021 PCA Framework: The 2017 notification of PCA framework applied to scheduled commercial banks but excluded Regional Rural Banks from its purview, while the 2021 version excludes Small Finance Banks and Payment Banks too.