Prelims Level
Mains Level
Prelims Syllabus : Economy Mains Syllabus : Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

In News:

  • The banks which are under the prompt corrective action (PCA) framework have been asked to provide an estimate of the quantum of provision for bad loans required for the January-March quarter and the shortfall in capital due to the provisioning, to the banking regulator before a decision can be taken to remove restrictions on some banks.

Explained:

  • The Board for Financial Supervision (BFS) of Reserve Bank of India (RBI) — which has been entrusted by the central bank board to review the performance of the banks under PCA. BFS is chaired by the RBI Governor and includes the four deputy governors and a few other board members
  • The financial results of the third quarter are coming out. Now, the banks have been asked to submit estimate for the fourth quarter, how much provision they require and due to which if there is any shortfall in capital. If there is a shortfall in capital, the government can step in to meet the capital requirement which could help some of the banks out of the PCA framework. Restrictions under prompt corrective action are imposed when a bank breaches certain risk threshold with respect to capital adequacy ratio, net non-performing asset ratio, return of assets and leverage ratio.
  • In December, the government decided to infuse ₹28,615 crore into public sector banks to support them with regulatory capital. One of the biggest beneficiaries of the exercise was Bank of India — also under the PCA framework — which received ₹10,086 crore.
  • Under the PCA framework, there are 11 public sector banks which have a 20% share in the loan market
  • Since the government was keen to see at least some banks under PCA come out of the curbs so that lending can get a boost

PCA Framework:

  • PCA framework was started in 2002 to activities of the banking sector
  • Its objective is to facilitate banks to take corrective measures including those prescribed by RBI, in timely manner to restore their financial health
  • PCA framework is supervisory tool of RBI, which involves monitoring of certain performance indicators of banks to check their financial health as early warning exercise and to ensure that banks don’t go bankrupted
  • The PCA framework would apply without exception to all banks operating in India including small banks and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.
  • The PCA framework is applicable only to commercial banks and not extended to co- operative banks, non-banking financial companies (NBFCs) and FMIs
  • PCA framework is invoked on banks when they breach any of three key regulatory trigger points (or thresholds). They are capital to risk weighted assets ratio, net non-performing assets (NPA) and Return on Assets (RoA), Asset Quality, Profitability, Leverage – of the banks. It also provides opportunity to RBI to pay focused attention on such banks by engaging. With focusing more closely in those areas
  • Depending on risk thresholds set in PCA framework, banks are put in two type of restrictions, mandatory and discretionary depending upon their placement in PCA framework levels.
  • The mandatory restrictions are on dividend, branch expansion, director’s compensation while discretionary restriction include curbs on lending and deposits
  • At present, 11 weak PSBs out of the 21 State-owned banks are under the PCA

Board for Financial Supervision (BFS):

Financial Supervision

  • The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India

Objective:

  • Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies

Constitution:

  • The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice- Chairman of the Board.

BFS meetings:

  • The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.
  • Some of the initiatives taken by BFS include:
    1. Restructuring of the system of bank inspections
    2. Introduction of off-site surveillance,
    3. Strengthening of the role of statutory auditors and
    4. Strengthening of the internal defences of supervised institutions
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