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Reserve Bank of India issues revised PCA framework for banks

Reserve Bank of India issues revised PCA framework for banks
Reserve Bank of India issues revised PCA framework for banks

The Reserve Bank of India (RBI) has reportedly put out a revised framework for PCA (Prompt Corrective Action) for banks to allow rightly-timed supervisory interventions and act as a medium of effectively attaining market discipline. The revised framework will be implemented from January 1, 2022.

RBI has stated that asset quality, capital, and leverage will be the crucial monitoring areas in the revised framework.

According to the revised framework, indicators to be tracked for leverage, asset quality, and capital would be Tier I Leverage Ratio, Net NPA Ratio, and CRAR/Common Equity Tier I Ratio respectively, and breaching any risk threshold will result in PCA invocation.

The central bank added that the PCA framework aims at enabling supervisory mediation at the right time and it needs the supervised entity to timely start and implement remedial solutions to restore its financial condition.

In addition to the prescribed corrective action, the Reserve Bank of India also noted that the PCA framework does not prevent it from taking other actions it considers right at any time.

The framework will be applicable to all banks operating in India which includes international banks operating via subsidiaries or branches on the basis of breaching risk thresholds of recognized indicators. A bank will be placed under the framework depending on the Audited Annual Financial Results and the current RBI-made Supervisory Assessment.

The central bank may impose the framework on any bank during a year’s course depending on the circumstances, which include inter-threshold migration. The framework also outlines the conditions for withdrawing any restriction and exiting from PCA.

If a bank is imposed with the PCA, many restrictions are placed on it. These restrictions are put on the profit remittance and dividend distribution, branch expansion, capital introduction in the case of international banks, and capital expenditure.

The Prompt Corrective Action framework was previously revised in April 2017.

Source credit:

https://www.business-standard.com/article/pti-stories/rbi-issues-revised-prompt-corrective-action-framework-for-banks-121110201548_1.html

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