RBI introduces PCA framework to improve financial health of UCBs

RBI introduces PCA framework to improve financial health of UCBs

Subject: Eco

Sec: Monetary policy

Context: The Reserve Bank of India (RBI) on Friday prescribed a Prompt Corrective Action (PCA) framework for relatively weak urban co-operative banks (UCBs), with deposits above ₹100 crore (upper tier category), to nurse them back to health.

Details:

• As per the framework, a financially unsound and ill-managed UCB can be brought under PCA if it breaches the risk thresholds of identified indicators pertaining to capital and profitability (net profit).
• Currently, there are around 1,500 UCBs in the country. RBI classifies UCBs as Tier-I (deposits up to ₹100 crore); Tier-2 (more than ₹100 crore and up to ₹1,000 crore); Tier-3 (deposits more than ₹1,000 crore and up to ₹10,000 crore); and Tier-4 (above ₹10,000 crore). Tiers 2 to 4 come under the upper Tier.
• RBI said the objective of the PCA Framework is to enable supervisory intervention at an appropriate time and require the UCBs to initiate and implement remedial measures in a timely manner, to restore their financial health
• The provisions of the PCA Framework will be effective from April 1, 2025.

• RBI has prescribed three risk thresholds for invoking PCA for breach of CRAR (10 per cent as of March-end 2024, 11 per cent as of March-end 2025 and 12 per cent as of March-end 2026) below the regulatory minimum – up to 250 basis points (bps); more than 250 bps but not exceeding 400 bps; and more than 400 bps.
• In the case of NNPAs, too three risk thresholds have been prescribed – greater than or equal to 6 per cent but below 9 per cent; greater than or equal to 9 per cent but below 12 per cent; and greater than or equal to 12 per cent.
• In the case of profitability, RBI has prescribed only one parameter “incurred losses during two consecutive years” for breach. In SAF too this was this parameter was prescribed.