Prompt Corrective Action (PCA) Framework

  • Prompt Corrective Action or PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.
  • The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital ratios, asset quality and profitability.
  • It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios.
  • Banks with a capital to risk-weighted assets ratio (CRAR) of less than 10.25 per cent but more than 7.75 per cent fall under threshold 1.
  • Those with CRAR of more than 6.25 per cent but less than 7.75 per cent fall in the second threshold.
  • In case a bank’s common equity Tier 1 (the bare minimum capital under CRAR) falls below 3.625 per cent, it gets categorised under the third threshold level.
  • Banks that have a net NPA of 6 per cent or more but less than 9 per cent fall under threshold 1, and those with 12 per cent or more fall under the third threshold level.
  • On profitability, banks with negative return on assets for two, three and four consecutive years fall under threshold 1, threshold 2 and threshold 3, respectively.

Why is it important?

  • As most bank activities are funded by deposits which need to be repaid, it is imperative that a bank carries a sufficient amount of capital to continue its activities.
  • PCA is intended to help alert the regulator as well as investors and depositors if a bank is heading for trouble. The idea is to head off problems before they attain crisis proportions.
  • Essentially PCA helps RBI monitor key performance indicators of banks, and taking corrective measures, to restore the financial health of a bank.
  • On breach of any of the risk thresholds mentioned above, the RBI can invoke a corrective action plan.
  • Depending on the threshold levels, the RBI can place restrictions on dividend distribution, branch expansion, and management compensation.
  • Only in an extreme situation, breach of the third threshold, would identify a bank as a likely candidate for resolution through amalgamation, reconstruction or winding up.
  • In 2018, RBI put a complete fresh lending ban on Dena Bank.
  • Currently, Indian Overseas Bank (IOB), Central Bank of India, UCO Bank and United Bank of India are under this framework

Leave a Reply

%d bloggers like this: