PCA framework Current Affairs - 2019
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Union Government is expecting that public sector banks (PSBs) placed under RBI’s Prompt Corrective Action (PCA) framework will come out of it by the end of this year. As many as 11 out of 21 state-owned banks are currently under PCA framework.
Operational performance of PSBs has improved in April-June 2018 quarter, with steep reduction in net losses, increase in recoveries and significant improvement in provision coverage ratio. Besides, government is also providing PSUs adequate capital when required. Some of capital already has been given, as recoveries is taking place and there is possibility that some banks will not need it. As of now, there no bank is breaching regulatory norms prescribed by RBI.
Prompt corrective action (PCA) framework
PCA framework is supervisory tool of RBI, which involves monitoring of certain performance indicators of banks to check their financial health as early warning exercise and to ensure that banks don’t go bust. Its objective is to facilitate banks to take corrective measures including those prescribed by RBI, in timely manner to restore their financial health. It also provides opportunity to RBI to pay focussed attention on such banks by engaging with management more closely in those areas.
PCA framework is invoked on banks when they breach any of three key regulatory trigger points (or thresholds). They are capital to risk weighted assets ratio, net non-performing assets (NPA) and Return on Assets (RoA). Depending on risk thresholds set in PCA framework, banks are put in two type of restrictions, mandatory and discretionary depending upon their placement in PCA framework levels. The mandatory restrictions are on dividend, branch expansion, directors compensation while discretionary restrictions include curbs on lending and deposit.
Reserve Bank of India (RBI) has put state-run lender Dena Bank under prompt corrective action (PCA) framework. It has barred Dena Bank from extending fresh credit in view of deteriorating financial health due to mounting non-performing assets (NPAs) and mounting losses. It makes Dena Bank first lender to face curbs on lending under PCA framework.
This means Dena bank can disburse loans for credit facilities already sanctioned, but cannot sanction fresh loans. In addition, RBI also has barred from recruiting more staff. RBI may lift these restrictions in case the bank improves profitability and reduces the ratio of bad loans.
In May 2017, RBI had placed Dena Bank under PCA framework, which had imposed restrictions including ban on dividend payments. Despite earlier restrictions, the financial health of Dena bank had not shown any signs of improvement, prompting the banking regulator to freeze fresh lending.
Dena bank’s loss had widened to Rs. 1,225.42 crore compared with previous year, when the loss was Rs. 575.26 crore. For financial year 2017-18, it had posted a net loss of ₹1,923.15 crore. This was third consecutive year bank has posted a net loss. Moreover, its gross NPAs as percentage of gross advances, was 22.4% as on end March 2018 as compared with 16.17% year earlier. In absolute terms, bad loans rose to Rs. 16,361.44 crore from Rs. 12,618.73 crore. The bank’s net NPAs were up to 11.95% or Rs. 7,838.78 crore from 10.66% or Rs. 7,735.12 crore.
Prompt Corrective Action (PCA) framework
PCA is process or mechanism to ensure that banks don’t go bust. Under it, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled. It was first introduced after global economy incurred huge losses due to failure of financial institutions during 1980s-90s.
Parameters for placing under PCA framework are Capital ratios, Asset Quality and Profitability. Indicators to be tracked for these three parameters are CRAR (Capital to Risk weighted Assets Ratio)/Common Equity Tier I ratio, Net NPA (non-performing assets) ratio and Return on Assets (RoA) respectively. If banks breach of any risk threshold mentioned above, it results in invocation of PCA against them.
RBI enforces these guidelines to ensure banks do not go bust and follow prompt measures to put their house in order. It has tightened its PCA framework in April 2017 to turn around lenders with weak operational and financial metrics, Depending on the risk thresholds set in PCA rules, banks placed under it are restricted from expanding number of branches, staff recruitment and increasing size of their loan book. Other restrictions include higher provisions for bad loans and disbursal only to those companies whose borrowing is above investment grades.