Prompt Corrective Action (PCA) is a system that the RBI imposes on banks showing signs of financial stress. The regulator considers banks as unsafe if they may fail to meet the standards and certain financial metrics or parameters.
It is basically a structured early-intervention mechanism for banks with weak financial records due to loss of profitability or poor asset quality.
RBI takes into come 4 factors to determine whether it needs to put a bank under the PCA framework. These include profitability, asset quality, capital ratios and debt level.
When RBI puts a bank on its PCA watch list, it imposes two types of limitations on it - mandatory and discretionary. These include restrictions related to the expansion of a branch, dividend and director’s remuneration and so on.
Apart from putting restrictions, some corrective measures are also taken, such as restructuring operations, special audits, bringing new management, superseding the banks, board of directors.
Benefits of PCA: One of the objectives of PCA is to amend the bank’s mistakes before they lead to a crisis. This framework has been designed to improve a bank’s financial performance by tracking vital metrics. In other words, it involves the RBI taking remedial measures.
RBI controls the loan disbursal of banks belonging to the PCA watch list. Plus, PCA banks cannot enter a new line of business, which improves their core financials.
If individuals hold deposits in a bank that has been put on RBI’s PCA list, this should not panic. The corrective measures of the regulator, including a change in the management, restructuring operations, may prove to be beneficial for the banking institution in the long run.
Generally, there are two methods through which banks themselves or the Government have tried to remove those banks put under the PCA list i.e. Mergers and amalgamation and Bank recapitalization.
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