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Prompt Corrective Action is a measure to maintain the financial health of banks, it involves monitoring of certain performance indicators as an early warning exercise.
Regulators use four different capital measures to determine a bank's capital category: 1. A total risk-based capital ratio 2. A Tier-1 risk-based capital ratio 3. A leverage ratio (or non-risk-based capital ratio) 4. Equity to assets ratio
The Main Objective of the RBl is to facilitate the banks to take corrective measures in order to restore their financial health
Benefits of Prompt Corrective Action 1.lt serves as a safeguard tool if other enforcement actions are delayed. 2.It empowers state banking regulators to close critically undercapitalized banks and provide a roadmap for doing so. 3.The 90-day closure provision in PCA facilitates an orderly resolution. 4.It encourages banks to hold more capital to minimize the possibility of triggering mandatory supervisory action. If banks undergo Prompt Corrective Action, it will not affect their performance, it will only improve the internal controls and improvements. Now, the banks would be monitored on the basis of capital, asset quality and profitability.
IDBI Bank, Indian Overseas Bank, UCO Bank, Dena Bank and the Central Bank of India have already come under the PCA initiated by the RBI, which is a noose-tightening on fresh loan disbursal as well as the dividend distribution. Recently, RBI has initiated Prompt Corrective Action against Bank of Maharashtra as well. Based on the revised PCA framework, a total of 16 PSBs out of 21 (excluding SBI associates) and 2 out of 16 private banks will require taking mandatory corrective actions or face restrictions to come out of the PCA framework. In extreme cases, the PCA framework provides the RBI with powers to force mergers or even wind up the non-compliant banks.
Mandatory Actions for Banks by RBI .Bank will not access/renew costly deposits and CDs. They will take steps to increase fee-based income. The Bank will take steps to contain administrative expenses. Bank will launch a special drive to reduce the stock of NPAs and contain generation of fresh NPAs. The Bank will not enter into new lines of business. Bank will reduce/skip dividend payments. RBI will impose restrictions on the bank on borrowings from the interbank market.
Discretionary Actions by RBI The Bank will not incur any capital expenditure other than for technological up gradation within Board approved limits. .Bank will not expand its staff or fill up vacancies.
Recently Prompt Corrective Action(PCA) are found in many of the Newspaper. PCA is related to a. It is a corrective action by RBl to stop forgery like Punjab National bank b. It is a corrective action for the farmers to get their fair price for their produce in the APMOC a. It is a measure to restore the financial health of the banks b. It is a government measure to take corrective action for controlling smog.
MBA,PGDFM Author of Bhavishya Arthik Patrika(for Civil Services), worked in SBI group for 7 years, teaching indian economy to UPSC student