Prompt Corrective Action of RBI

Reserve Bank of India (RBI) has issued a policy action (first in May 2014 and revised effective from April 1, 2017) in the form of prompt corrective action (PCA) framework. When a bank have low capital adequacy or high Non- performing assets, which are specified as trigger point; in such case, RBI takes a corrective action.

The parameters that invites corrective action from RBI are:

• Capital to Risk weighted Asset ratio (CRAR) 
• Net Non-performing Asset (NPA) 
• Return on Asset (ROA) 
• Leverage Ratio 

When these parameter reached the trigger point (like Capital Adequacy ratio goes down to less than 9% and NPA goes up to more than 10%) the RBI will initiate certain action for the bank.

In this framework certain restriction are take place such as halting branch expansion and stop dividend payment, cap a bank’s landing limit.

Two types of restriction are there

1. Mandatory ( Restriction on dividend branch expansion, directors compensation)
2. Discretionary (restrictions on lending and deposit)

The salient feature of revised PCA framework for Banks:

• For monitoring in the revised framework, the key areas are capital, asset quality and profitability. 
• The indicator, which tracked the key areas, would be CRAR/ common equity Tier 1 ratio, net NPA ratio and return on assets. 
• Leverage would be monitored. 
• It applied for all banks including small banks and foreign banks operating in India. 
• PCA framework also based on the audited annual financial results and the supervisory Assessment made by RBI. 

The PCA is invoked when risk threshold such as capital, asset quality and profitability are breached.

Strategy related action:

• Activate the Recovery plan
• Undertake a detailed review of business model in terms of sustainability, profitability, viability and projections. 
• Review medium term business plan, scope for enhancement. 
• Identify the targets and set milestone for progress and achievements. 

Two banks where PCA invoked were IDBI Bank and UCO Bank both the banks breached risk threshold 2.

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