Prompt Corrective Action (PCA) in Banking: An Overview
by Yuvi K - December 16, 2023
Introduction (परिचय)
Prompt Corrective Action (PCA) is a series of banking regulations imposed by the Reserve Bank of India (RBI) for early detection of banking distress and to restore the financial health of the banks. The objective of PCA is to provide an opportunity to a weak bank to come out of its weak financial state through corrective measures.
What is PCA Framework? (PCA ढांचा क्या है?)
The Reserve Bank of India (RBI) issued the first PCA framework in April, 2017 as a part of the 9th July, 2013 revision of Master Circular on Prudential Framework. RBI releases the criteria and uses these to identify banks for the possible implementation of the PCA regime. The criteria includes indicators like capital to risk weighted assets ratio (CRAR), Net NPA, RoA, Return on Assets (RoA) and leverage ratio.
Capital to Risk Weighted Assets Ratio (CRAR): This is the ratio between a bank’s capital and risks weighted assets. This ratio acts as a measure of a bank’s capital and hence can be used to gauge the amount of risk a bank is taking. Generally, a ratio of 10% or higher is considered healthy for a bank.
Net Non-Performing Assets (NNPA): This is the ratio between a bank’s Non- Performing Assets (NPA) and total advances. This ratio acts as a measure of a bank’s credit quality. Generally, a ratio of 5% or lower is considered healthy for a bank.
Return on Assets (RoA): This is the ratio between a bank’s profits and total assets. This ratio shows how efficiently a bank is managing its resources. Generally, a ratio of 1% or higher is considered healthy for a bank.
Leverage Ratio: This is the ratio between a bank’s equity capital and total debt. This ratio indicates the amount of debt that a bank is taking in comparison to its equity capital. Generally, a ratio of 3:1 or higher is considered healthy for a bank.
How does RBI implement PCA? (आरबीआई पीसीए कैसे लागू करती है?)
RBI monitors the performance of banks through the PCA framework on a regular basis. If the performance of bank fails to meet any of the specified criteria, the RBI will initiate the PCA regime and certain corrective measures would be implemented to improve the financial health of the bank. These corrective measures are as follows:
1. Restriction on dividend payment: The bank will not be allowed to make dividend payment from profits earned in the current financial year or previous financial year.
2. Restriction on branch expansion: The expansion of branches of the weak bank will be restricted.
3. Limit on management remuneration: There will be a limit on the amount of remuneration that can be paid to the bank’s management.
4. Asset composition restrictions: The overall asset composition of the bank will be restricted so that the proportion of high-risk assets is reduced.
5. Restriction on borrowings and investments: The bank will be restricted from making fresh borrowings and investments.
6. Restrictions on foreign exchange transactions: The bank will be restricted from making foreign exchange transactions, except for those related to trade transactions.
Conclusion (निष्कर्ष)
The PCA framework provides the RBI with an opportunity to identify banks which may be in financial distress and to take corrective measures to improve their financial health. It is important to note that the PCA framework is not meant to be punitive, but rather is designed to provide banks with an opportunity to improve their financial health by implementing appropriate corrective measures.
