Bank of India Current Affairs - 2019

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Relaxation of Norms under PCA Framework

It is said that the finance ministry and the Reserve Bank of India are working on providing some relaxation on the prompt corrective action (PCA) framework for stressed banks.

Prompt Corrective Action (PCA) Framework

Prompt Corrective Action (PCA) framework has been issued by the RBI to maintain the sound financial health of banks. The RBI will initiate certain structured and discretionary actions for the bank under the PCA. The PCA framework kicks in when the Banks breach any of the three key regulatory trigger points

  • Capital to risk-weighted assets ratio
  • Net non-performing assets
  • Return on assets.

The PCA framework is aimed at nudging the banks to take corrective measures in a timely manner, in order to restore their financial health.

Eleven Banks which are under PCA framework are Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank and United Bank of India.

Why there is a proposal for providing relaxation now?

After several measures taken for capital infusion in the Public Sector Banks, the Banks are well-capitalised. Even though the banks have not only shown improvement on recoveries but have further de-risked their portfolios. The relaxation would aid banks in exiting the PCA framework.

The Parliamentary Committee on Finance had observed that “It is not clear as to how these banks will turn around their operations with the existing curbs on lending and even deposit-taking in the case of some. This could trigger a vicious cycle in the banking sector and the economy at large”. The committee had recommended reviewing the PCA framework.

RBI brings Bank of India under Prompt Corrective Action

The Reserve Bank of India (RBI) recently had initiated prompt corrective action (PCA) measures against Bank of India (BoI) in the view of its high non-performing assets (NPAs) and insufficient capital.

The RBI placed BOI under PCA consequent to the onsite inspection under the risk-based supervision model carried out for year ended March 2017. This was in view of high net NPA, insufficient CET1 Capital and negative ROA (return on asset) of BOI for two consequent years.

Prompt Corrective Action (PCA)

The RBI under its supervisory framework uses various measures and tools to maintain sound financial health of banks. PCA is one of such supervisory tools used by RBI. It involves monitoring of certain performance indicators of banks as early warning exercise.

RBI has defined three kinds of risk thresholds under PCA framework that will depend upon the type of risk threshold that was breached. It is initiated once such thresholds as relating to capital, asset quality and profitability are breached.

The objective is to facilitate banks to take corrective measures in timely manner including those prescribed by the RBI in order to restore their financial health. It also provides opportunity to RBI to pay focused attention on such banks by engaging with management more closely in those areas.

The PCA framework is intended to encourage banks to eschew certain riskier activities and focus on conserving capital so that their balance sheets can become stronger. Banks are placed under it depending upon audited annual financial results and RBI’s supervisory assessment.

If a bank breaches risk threshold under PCA framework, then mandatory actions include restriction on dividend payment and remittance of profits, restriction on branch expansion, restriction on management compensation and director’s fees.