Prompt Corrective Action Current Affairs - 2020
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.
Tags: Allahabad Bank • Bank of India • Bank of Maharashtra • Central Bank of India • Corporation Bank
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.