What is Prompt corrective action(PCA) Framework?
-
PCA is an RBI framework. Banks with weak financial metrics are put under the PCA framework by the Reserve Bank of India(RBI).
-
Aim: It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.
When was the PCA framework introduced?
-
The RBI introduced the PCA framework in 2002. It is a structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.
When does RBI invoke PCA?
-
The PCA framework is invoked when banks breach any of the three key regulatory trigger points namely
-
Capital to risk-weighted assets ratio
-
Net non-performing assets(NPA) and
-
Return on assets(RoA).
-
What are the restrictions on Banks when PCA is invoked?
There are two types of restrictions:
Mandatory Restrictions: It includes:
-
Restrictions on Dividends
-
Restrictions on Branch expansion
-
Restrictions on Management compensation among others.
Discretionary Restrictions: It includes
-
Curbs on lending and deposits.
-
Recommending the bank owner to bring new management and board among others.
PCA for NBFCs:
-
RBI has extended PCA to cover NBFCs.
-
The PCA Framework for NBFCs has been brought after four big finance firms: IL&FS, DHFL, SREI and Reliance Capital, which collected public funds through fixed deposits and non-convertible debentures collapsed in the last three years despite the tight monitoring in the financial sector. They collectively owe over Rs 1 lakh crore to investors.