PCA FRAMEWORK

PCA FRAMEWORK

Subject : Economics

Context : The Finance Ministry expects the remaining three public sector banks (PSBs) to be out of the RBI’s prompt corrective action (PCA) framework in two months, as their financial health has improved.

Concept :

• Indian Overseas Bank, Central Bank of India and UCO Bank are currently under this framework which puts several restrictions on them, including on lending, management compensation and directors’ fees.

Prompt Corrective Action (PCA) Framework

• PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.
• The RBI introduced the PCA framework in 2002 as a structured early-intervention mechanism for banks that become under capitalised due to poor asset quality, or vulnerable due to loss of profitability.
• It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.
• The framework was reviewed in 2017 based on the recommendations of the working group of the Financial Stability and Development Council on Resolution Regimes for Financial Institutions in India and the Financial Sector Legislative Reforms Commission.
• PCA is intended to help alert the regulator as well as investors and depositors if a bank is heading for trouble.
• The idea is to head off problems before they attain crisis proportions.
• Essentially PCA helps RBI monitor key performance indicators of banks, and taking corrective measures, to restore the financial health of a bank.
• The PCA framework deems banks as risky if they slip some trigger points – capital to risk weighted assets ratio (CRAR), net NPA, Return on Assets (RoA) and Tier 1 Leverage ratio.
• Certain structured and discretionary actions are initiated in respect of banks hitting such trigger points.
• The PCA framework is applicable only to commercial banks and not to co-operative banks and non-banking financial companies (NBFCs).