PROMPT
CORRECTIVE ACTIONS - ECONOMY
News: RBI extends prompt corrective action
framework to govt NBFCs
What's
in the news?
●
The Reserve Bank of India has decided to
extend the prompt corrective action (PCA) framework for non-banking financial
companies (NBFCs) to government NBFCs
(except those in base layer) with effect from October 1, 2024.
Key
takeaways:
●
The objective of the PCA framework is to
enable supervisory intervention at
appropriate time and require the supervised entity to initiate and implement
remedial measures in a timely manner, so as to restore its financial health.
●
The PCA framework is also intended to act
as a tool for effective market discipline.
Prompt
Corrective Action:
●
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 fail to meet the standards on certain
financial metrics or parameters.
●
Reserve Bank of India had introduced a
Prompt Corrective Action Framework (PCA) for Scheduled Commercial Banks in 2002.
Application:
●
The framework applies to all banks operating in India, including
foreign banks operating through branches or subsidiaries based on breach of
risk thresholds of identified indicators.
●
The PCA
Framework for NBFCs, came into effect from October 1, 2022. This is to
further strengthen the supervisory tools applicable to NBFCs.
●
However, payments banks and small finance banks (SFBs) have been removed from
the list of lenders where prompt corrective action can be initiated.
When
does RBI invoke PCA?
The central bank will track three
indicators as follows.
1.
Capital to Risk-Weighted Assets Ratio (CRAR): It is a bank's
available capital expressed as a percentage of a bank’s risk-weighted credit
exposures.
2.
Tier-I leverage ratio: It is the relationship between a
banking organization’s core capital and its total assets.
3.
Net Non-Performing Assets (NNPAS): Including
Non-Performing Investments (NPIS). NPA are loans for which the principal or
interest payment remained overdue for a period of over 90 days
In the case of core investment companies (CICs), the
RBI will track,
What
are the restrictions on Banks when PCA is invoked?
There are two types of
restrictions as follows.
1.
Mandatory Restrictions:
●
Restrictions on Dividends
●
Restrictions on Branch expansion
●
Restrictions on Management compensation
among others.
2.
Discretionary Restrictions:
●
Curbs on lending and deposits.
●
Recommending the bank owner to bring new
management and board among others.