RBI has come up with a notification titled “Revised Prompt Corrective Action (PCA) framework for banks.” The revised framework would apply to all banks operating in India including small and foreign banks. The new set of provisions will be effective from April 1 based on the financials of banks as of March 2017. The revised framework will override the existing PCA framework. The revised framework will be again reviewed after three years.
Need for revised framework
RBI had promised to revise the PCA framework at its first monetary policy review of the current fiscal held on April 6, as the bad loans including those already restructured reached USD 80 billion or 15% of the system as of March 2017. As per the estimates, the NPAs of state-run banks reached Rs 6.3 lakh crore as of September compared to Rs 5.5 lakh crore at the end of June 2016.
Salient guidelines of revised PCA
Capital, Asset Quality and profitability would be the basis on which the banks would be monitored. Banks would be placed under PCA framework depending upon the audited annual financial results and RBI’s supervisory assessment. RBI may also impose PCA on any bank including migration from one threshold to another if circumstances so warrants. RBI has defined three kinds of risk thresholds and the PCA will depend upon the type of risk threshold that was breached.
If a bank breaches the risk threshold, then mandatory actions include the restriction on dividend payment/remittance of profits, restriction on branch expansion, higher provisions, restriction on management compensation and director’s fees. Specifically, the breach of ‘Risk Threshold 3’ of CET1 (common equity tier 1) by a bank would call for resolution through tools like amalgamation, reconstruction, winding up among others.
RBI in its discretion can also carry out the following actions:
- Recommend the bank owner be it government/promoters/parent of foreign bank branch to bring in new management/board.
- Advise bank’s board to activate the recovery plan as approved by the supervisor.
- Advise bank’s board to carry out a detailed review of business model, the profitability of business lines and activities, assessment of medium and long-term viability, balance sheet projections among others.
- Review short term strategies and medium-term business plans and carry out any other corrective actions like the removal of officials and supersession or suppression of the board.