The Prompt Corrective Action (PCA) framework is a set of measures that is activated when a bank breaches certain regulatory thresholds related to capital adequacy, asset quality, and profitability.
Once triggered, the RBI imposes restrictions on the bank to prevent it from taking excessive risks and to ensure corrective measures are taken to restore its financial health.
The key parameters that trigger the activation of the PCA framework include:
Capital Adequacy Ratio (CAR): If a bank's capital adequacy falls below the minimum prescribed level, the PCA framework may be triggered.
Net Non-Performing Assets (NPA): If a bank's net NPAs cross a certain threshold, indicating a deterioration in asset quality, the PCA framework may be initiated.
Return on Assets (ROA): If a bank's profitability, as measured by its return on assets, falls below a specified level, the PCA framework may be triggered.
Leverage Ratio: If a bank's leverage ratio falls below the minimum requirement, it can be a trigger for PCA.
Once a bank is placed under the PCA framework, the RBI imposes various restrictions, such as curbing lending, restricting dividend distribution, and implementing strict monitoring of the bank's operations. The goal is to encourage the bank to take corrective actions and improve its financial health.
When RBI puts a bank on its PCA watchlist, it imposes two types of limitations on it - mandatory and discretionary. It totally depends on RBI.
How do banks benefit from PCA? One of the objectives of the PCA is to amend the bank's mistakes before they lead to a crisis. This framework improves a bank’s financial performance by tracking vital metrics. It involves the RBI taking remedial measures.
PCA banks cannot enter a new line of business that improves their core financials except for the banks that RBI might choose to initiate amalgamation.
How can banks get off the RBI’s PCA list? There are two widely used methods through which banks themselves or the government have tried to remove the banks from the PCA list: Mergers and amalgamation and bank recapitalization.
This framework of RBI is very crucial in times of loss. While some banks have the capacity to withstand challenging phases, others do not. This is where RBI steps in through this framework, essentially providing an opportunity for the banks to clean their operations.
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