Prompt Corrective Action Framework

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.