Public Sector Banks to Come Out of PCA Framework

Why in News?

  • Union Government is expecting that public sector banks (PSBs) placed under RBI’s Prompt Corrective Action (PCA) framework will come out of it by the end of this year.

What is Prompt corrective action (PCA) framework?

  • PCA framework is a supervisory tool of RBI, which involves monitoring of certain performance indicators of banks to check their financial health as an early warning exercise and to ensure that banks don’t go bust.
  • Its objective is to facilitate banks to take corrective measures including those prescribed by RBI, in timely manner to restore their financial health.
  • It also provides opportunity to RBI to pay focussed attention on such banks by engaging with management more closely in those areas.
  • 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).
  • Depending on the risk thresholds set in PCA framework, banks are put in two types 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 restrictions include curbs on lending and deposit.

New PCA framework under process:

  • RBI has placed eleven public sector banks – Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank and United Bank of India under the PCA framework.
  • Of these, two banks – Dena Bank and Allahabad Bank – are facing restriction on expansion of business.
  • Various measures taken by the government including implementation of the Insolvency and Bankruptcy Code (IBC) has yielded good results in terms of reining bad loans and increasing recovery.
  • The framework is not intended to constrain the performance of normal operations of the banks for the general public.

What are the reasons behind this decision of Government?

  • Operational performance of PSBs has improved in April-June 2018 quarter, with steep reduction in net losses, increase in recoveries and significant improvement in provision coverage ratio.
  • Besides, Government is also providing PSUs with adequate capital when required.
  • Some of the capital has already been given, as recoveries are taking place and there is a possibility that some banks will not need it in the future.
  • As of now, there is no bank that is breaching the regulatory norms prescribed by RBI.
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