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Prompt Corrective Action Framework

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prompt Corrective Action Framework:


Context:

The Reserve Bank of India has taken IDBI Bank Ltd out of its prompt corrective action list after it found the state-run lender was not in breach of the central bank’s parameters.

Background:

IDBI Bank was placed under the so-called PCA framework in 2017 over its high bad loans and negative return on assets, at a time when Indian lenders battled record levels of soured assets, prompting the RBI to tighten thresholds.

  • Now, the bank has provided a written commitment that it would comply with the norms of minimum regulatory capital, Net NPA and Leverage ratio on an ongoing basis and has apprised the RBI of the structural and systemic improvements that it has put in place which would help the bank in continuing to meet these commitments.

What is Prompt Corrective Action (PCA)?

  • PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.
  • The RBI introduced the PCA framework in 2002 as a structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.
  • It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.
  • The framework was reviewed in 2017 based on the recommendations of the working group of the Financial Stability and Development Council on Resolution Regimes for Financial Institutions in India and the Financial Sector Legislative Reforms Commission.

When is Prompt corrective action framework invoked?

The PCA is invoked when certain risk thresholds are breached. There are three risk thresholds which are based on certain levels of asset quality, profitability, capital and the like.

What are the types of restrictions?

There are two type of restrictions, mandatory and discretionary. Restrictions on dividend, branch expansion, directors compensation, are mandatory while discretionary restrictions could include curbs on lending and deposit.

What will a bank do if PCA is triggered?

  • Banks are not allowed to renew or access costly deposits or take steps to increase their fee-based income.
  • Banks will also have to launch a special drive to reduce the stock of NPAs and contain generation of fresh NPAs.
  • They will also not be allowed to enter into new lines of business. RBI will also impose restrictions on the bank on borrowings from interbank market.

InstaLinks:

Prelims Link:

  1. About PCA.
  2. Features.
  3. Parameters.

Mains Link:

Discuss the significance of PCA framework.

Sources: ET.