Revised framework of PCA

Table of Contents

Revised framework of PCA: Relevance

GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Recently, RBI has announced a revised Prompt Corrective Action (PCA) framework for banks to enable supervisory intervention at an “appropriate time” and also act as a tool for effective market discipline.

The revised PCA framework will be applicable from January 1, 2022.
Under the revised framework, return on assets as a parameter has been excluded which may trigger action under the framework.
Payments banks and small finance banks (SFBs) have also been removed from the list of lenders where prompt corrective action can be initiated.
Revised PCA framework RBI key areas: Under the revised PCA framework, indicators to be tracked for capital, asset quality and leverage would be CRAR/ common equity tier I ratio, net NPA ratio and tier I leverage ratio, respectively.
In governance related actions, the RBI can supersede the board under Banking Regulation Act, 1949.

The framework will apply to all banks operating in India, including foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.

A bank will generally be placed under PCA framework based on the audited annual financial results and the ongoing supervisory assessment made by the RBI.

The PCA framework was first introduced in December 2002 as a structured early intervention mechanism.
These regulations were later revised in April 2017.
RBI uses PCA framework to rein in banks that have breached certain regulatory thresholds in bad loans and capital adequacy.
PCA entails curbs on high-risk lending, setting aside more money on provisions and restrictions on management salary.