RBI Takes 3 Banks off Prompt corrective Action Framework
27, Feb 2019
Prelims level : Economy Mains level : Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment
Three more banks — Allahabad Bank and Corporation Bank, from the public sector, and Dhanlaxmi Bank from the private sector — are now out of the Reserve Bank of India’s (RBI) prompt and corrective action (PCA) framework.
- There are another six banks that are still under PCA framework. IDBI Bank, UCO Bank, Central Bank of India, Indian Overseas Bank, Dena Bank, United Bank of India are still under the PCA framework
- The recent capital infusion of Rs 48,239 crore in 12 public sector banks (PSBs) will help Corporation Bank 6.98 % and Allahabad Bank 4.55 % to come out of the Prompt Corrective Action (PCA) framework
- This has shored up their capital funds and also increased their loan loss provision to ensure that the PCA parameters were complied with
- RBI also decided to take Dhanlaxmi Bank out of PCA, as the bank was found not to be breaching any of the risk thresholds of the framework.
- Since commencement of clean-up in 2015-16, the recapitalization has crossed over Rs 3 lakh crore through mix of budgetary support and market raising helping banks to make adequate provisions for the bad loans.
- As a result, there has been reversal in the deteriorating bad loan situation and there has been record loan recovery during the current fiscal.
- PCA framework gets triggered when a bank breaches one of the three risk thresholds.
- Crossing 6% net NPA is one of them.
- PCA framework was started in 2002 to regulate 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 restrictions, mandatory and discretionary framework levels.
- framework, banks are put in two type of depending upon their placement in PCA
- The mandatory restrictions are on dividend, branch expansion, director’s compensation while discretionary restriction include curbs on lending and deposits. At present, 6 weak PSBs out of the 21 State-owned banks are under the PCA.