On Tuesday, The RBI published a reviewed Prompt Corrective Action (PCA) structure for banks to allow supervisory intervention at “appropriate time” and act as a mechanism for efficient market control. The RBI said that capital, asset quality, and leverage would be critical for monitoring the updated structure.
The revised PCA structure will be effective from January 1, 2022. “The objective of the PCA Framework is to enable Supervisory intervention at an 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 central bank said.
The PCA structure is also designed to serve as a tool for an efficient market system. The central bank also emphasised that the PCA Framework does not hinder the Reserve Bank of India from exercising any other action as it considers appropriate at any time, in addition to the restorative measures directed in the framework.
“Indicators to be tracked for capital, asset quality and leverage would be CRAR/Common Equity Tier I Ratio, Net NPA Ratio and Tier I Leverage Ratio, respectively,” according to the revised framework. Infringement of any risk threshold may end in an invocation of the PCA.
The structure will appeal to all banks functioning in India, including foreign banks working through branches or subsidiaries based on breach of risk thresholds of distinguished indicators. “A bank will generally be placed under PCA framework based on the Audited Annual Financial Results and the ongoing Supervisory Assessment made by RBI.
“RBI may impose PCA on any bank during the course of a year (including migration from one threshold to another) in case the circumstances so warrant,” it said. The structure also specifies conditions for exit from PCA and removal of restrictions. If a bank is put under the PCA, several restrictions are placed on it. The limitations are inflicted on dividend distribution and transmittal of profits, bringing in the capital (in the case of foreign banks), branch expansion, and capital expenditure. The framework was last updated in April 2017.