RBI Revised Prompt Corrective Action (PCA) Framework - (13 Apr 2017)

Banking

RBI has issued Revised Prompt Corrective Action (PCA) framework for banks which will override existing PCA framework. New set of provisions will be effective from April 1 based on financials of banks for year ended March 31, 2017. Revised framework would be applicable to all banks operating in India including small and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators. Further, after three years, it will be reviewed with new guidelines.

It is estimated that, NPAs of state-run banks has reached Rs 6.3 lakh crore as of September compared to Rs 5.5 lakh crore at the end of June 2016. A bank will be placed under PCA framework on basis of audited annual financial results and RBI’s supervisory assessment. Although, RBI may impose PCA on any bank during course of a year, (including migration from one threshold to another) in case circumstances so warrant, Banks would be monitored on basis of revised PCA Capital, Asset Quality and profitability. Failure to meet any of these norms could invite RBI action on these lenders, which could include strictures on lending and branch expansion, change in management and reduction in assets. It also provides that, PCA would kick in, if a bank breaches either CRAR or CET 1 ratio by up to 250 bps below indicator between 10.25 per cent and 7.75 per cent.

In case of breach of leverage levels, promoters/owners/parent in case of foreign banks would have to bring in capital to meet special supervisory requirement. Further, there will be restrictions on branch expansion plans; domestic or overseas. RBI would advise bank’s Board to activate Recovery Plan that has been duly approved by supervisor. Undertake a detailed review of business model in terms of sustainability of the business model, profitability of business lines and activities, medium and long term viability, balance sheet projections, etc. Review short term strategy focusing on addressing immediate concerns. Credit risk related actions includes preparation of time bound plan and commitment for reduction of stock of NPAs, preparation of and commitment to plan for containing generation of fresh NPAs, Strengthening of loan review mechanism, Restrictions on/ reduction in credit expansion for borrowers below certain rating grades , Reduction in risk assets etc.

Infact, apart from these mandatory actions, RBI has armed itself with discretionary powers such as winding up the bank or merging it, which it would use when the highest risk threshold is breached. However, it is yet to be seen that how effectively these are implemented taking into consideration the fragile condition of NPA infected banks.

Tags : FRAMEWORK ISSUANCE RESTRICTIONS