Image Source Mar 14, 2021 09:56 IST , Updated: Nov 08, 2021 17:56 IST · 2 min read
In 2021, UCO Bank, IDBI Bank and Indian Overseas Bank exited the framework on improved performance. Only Central Bank of India remains under it now.
What is Prompt Corrective Action (PCA) ?
The RBI introduced the PCA framework in 2002 as a structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.The framework was reviewed in 2017 based on the recommendations of the working group of the Financial Stability and Development Council on Resolution Regimes for Financial Institutions in India and the Financial Sector Legislative Reforms Commission.
PCA is intended to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector and help alert the regulator as well as investors and depositors if a bank is heading for trouble.
The Prompt Corrective Action framework (PCA) deems banks as risky if they slip some trigger points - capital to risk weighted assets ratio (CRAR), net NPA, Return on Assets (RoA) and Tier 1 Leverage ratio.
The PCA framework is applicable only to commercial banks and not to co-operative banks and non-banking financial companies (NBFCs).
Certain structured and discretionary actions are initiated in respect of banks tagged with Prompt Corrective Action framework (PCA). There are two type of restrictions, mandatory and discretionary.
RBI can place restrictions on these banks's borrowings from interbank market, dividend distribution, branch expansion, management compensation and may also restrict the bank to enter into new lines of business.
Banks under the framework are also require to launch a special drive to reduce the stock of NPAs and contain generation of fresh NPAs.
In an extreme situation, a bank would be a likely candidate for resolution through amalgamation, reconstruction or winding up.
What are Non Performing Assets (NPA) ?
Non Performing Assets (NPA) is any asset (loan or lease) of a bank which is not producing any income.Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue.
For agricultural loans, if the interest and/or the installment or principal remains overdue for two harvest seasons, it is declared as NPAs. But, this period should not exceed two years.
1. Sub-standard: When the NPAs have aged <= 12 months.
2. Doubtful: When the NPAs have aged > 12 months.
3. Loss assets: When the bank or its auditors have identified the loss, but it has not been written off.
Capital Adequacy Ratio (CAR)
The CAR is a measure of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. The Capital Adequacy Ratio, also known as Capital-to-risk weighted assets ratio (CRAR), is used to protect depositors and promote the stability and efficiency of financial systems around the world.CAR = (Tier 1 Capital + Tier 2 Capital) / Risk Weighted Assets
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Return on assets (RoA) measures profitability, derived from net income (profit) as a percentage of total assets.
The leverage ratio shows how much a lender has stretched itself in borrowing funds to generate income. The more the leverage, the riskier the turf on which the lender stands.