Prompt Corrective Action

Introduction

• To prevent commercial banks from going bankrupt, the RBI has established various trigger points for assessing, monitoring, controlling, and corrective actions on weak and unstable banks. PCA refers to the process or mechanism through which such activities are carried out. 

PCA Framework

• The PCA framework defines banks as hazardous if they fall short of predefined standards on three parameters: asset quality, capital ratios, and profitability. 
• There are three risk threshold levels based on where a bank stands on these ratios (1 being the lowest and 3 being the highest). 
• Banking institutions with a capital-to risk-weighted-assets ratio (CRAR) of less than 10.25 percent but more than 7.75 percent are classified as meeting threshold 1. 
• Banks with a CRAR of greater than 6.25 percent but less than 7.75 percent are classified as threshold 2. 
• If a bank’s common equity Tier 1 (the CRAR’s basic minimum capital requirement) falls below 3.625 percent, it is categorized as threshold 3. y Banking institutions having Net NPAs of 6% or more but less than 9% are categorized as threshold 1, whereas those with NPAs of 12% or more are designated as threshold 3. 
• Banks that have experienced a negative return on assets for two, three, or four years fall under criteria 1, 2, and 3, respectively, in terms of profitability.

Important Points

• Prompt Corrective Action (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 actions that can be imposed on banks include special audit, restructuring operations and activation of the recovery plan.
• Banks’ promoters can be asked to bring in new management, too. The RBI can also supersede the bank’s board, under PCA.