What is PCA (Prompt Corrective Action) imposed by RBI on Banks?

PCA stands for Prompt Corrective Action.

The Reserve Bank of India 2002 introduced a Prompt Corrective Action Framework, especially for Scheduled Commercial Banks.

The primary objective of incorporating Prompt Corrective Action on commercial banks is to restore financial health by inducing timely supervision.

It is also great to strengthen financial systems and introduce necessary remedies.

PCA is a framework to induce financial discipline in financial institutions like commercial banks.

NBFCs are also included in the PCA framework, and it will come into effect from October 1, 2022.

What are the PCA Frameworks designed for Commercial Banks?

The PCA Framework created by RBI for the scheduled commercial banks are,

The central bank will monitor the key areas- Capital, Asset Quality, and Leverage.

The indicators that the central bank will track are- Capital, Asset Quality, and Leverage would be CRAR/ Common Equity Tier 1 Ratio, Net NPA Ratio, and Tier 1 Leverage Ratio.

If the central bank funds any breach in the risk threshold of the scheduled commercial banks, then there will be an intervention and invocation of PCA.

The PCA framework applies to all commercial banks in India; it includes foreign banks or their subsidiaries.

Any bank will be placed under the PCA framework after the Audited Annual Financial Results and the Supervisory Assessment by RBI.

RBI has a provision to impose PCA on any bank during a year per the circumstances.

There is a provision for commercial banks to opt out of the PCA framework under the following circumstances,

If the bank manages to have no breaches in their risk threshold for four continuous quarterly financial statements. One of the statements must include Audited Annual Financial Statement. All the above is possible after the assessment made by RBI.

If the bank provides a sustainable and profitable comfort to the supervisory body of the RBI.

What are the mandatory actions prescribed by RBI to the banks under PCA?

The banks under PCA have specified the following mandatory actions by the RBI to improvise financial health and induce financial discipline.

The mandatory actions prescribed are based on the Risk Threshold the banks are divided under.

Risk Threshold 1

For the banks under Risk Threshold 1, the following are the mandatory actions prescribed,

There are restrictions imposed on dividend distribution.
There are restrictions set on profits remittance.
For Foreign Banks, the promoters have to bring the capital.

Risk Threshold 2

For the banks under Risk Threshold 2, the following are the mandatory actions prescribed,

There are restrictions imposed on dividend distribution.
There are restrictions imposed on profits remittance.
For Foreign Banks, the promoters have to bring the capital.
There are restrictions imposed on branch expansions, domestically or overseas.

Risk Threshold 3

For the banks under Risk Threshold 3, the following are the mandatory actions prescribed,

There are restrictions imposed on dividend distribution.
There are restrictions imposed on profits remittance.
For Foreign Banks, the promoters have to bring the capital.
There are restrictions imposed on branch expansions, domestically or overseas.
There are restrictions imposed on capital expenditures.
There are restrictions on technological advancements not approved by the Board.

What are the discretionary actions prescribed by RBI to the banks under PCA?

Commercial banks under PCA are also prescribed specific discretionary actions common to banks under all risk thresholds.

1. Special Supervisory Actions

The RBI may impose the following particular supervisory-related actions,

It may conduct Special Supervisory Monitoring Meetings (SSMMs) quarterly.
It may introduce sudden inspections.
It may perform a special bank audit by the extant Supervisory mechanism.
It may also choose to resolve the bank by Amalgamation or Reconstruction.

2. Strategy-Related Actions

The RBI may impose the following strategy-related actions,

It may activate the Recovery Plan.
It may review the business model in detail.
It may also review the short-term strategy of the bank.
It may also review medium-term business plans.
It may introduce appropriate business process reengineering.
It may also introduce restructuring operations.

3. Governance-Related Actions

The RBI may impose the following governance-related actions,

It will actively engage with the bank’s Board.
It may suggest the bank for new management.
It may remove people from managerial positions.
It may supersede the Bank’s Board.
It may ask the bank to revive clawback and malus clauses and other actions
It may also impose restrictions on directors’ or management compensation.

4. Capital Related Actions

The RBI may impose the following capital-related actions,

It may involve capital planning.
It may propose plans to raise additional capital.
It may ask the bank to bolster reserves through retained profits.
It may halt investments in subsidiaries.
It may restrict the expansion of high-risk-weighted assets.
It may reduce the bank’s exposure to high-risk sectors.
It may impose restrictions on increasing stake in subsidiaries.

5. Credit Risk-Related Actions

The RBI may impose the following credit risk-related actions,

It may plan to reduce the stock of NPAs.
It may plan to generate fresh NPAs
It may induce higher provisions for NPAs/NPIs.
It may strengthen the loan review process.
It may impose restrictions on total credit risk weight density.
It may try to reduce loan concentrations.
It may look to sell assets.
It may plan to recover assets.
It may impose restrictions on the expansion of credit/ investment portfolios.

6. Market Risk Related Actions

The RBI may impose the following market risk-related actions,

It may halt the borrowings from the interbank market.
It may impose restrictions on accessing/ renewing wholesale deposits/ costly deposits/ certificates of deposits.
It may reduce derivative activities that permit collateral substitution
It may reduce the additional maintenance of collateral.

7. HR Related Actions

The RBI may impose the following HR-related actions,

The central bank will ask to halt staff expansion.
It will review the specialized training needs of existing staff.

8. Profitability-related Actions

The RBI may impose the following profitability-related actions,

Restrictions imposed on capital expenditure.
Restrictions of technological upgradation except the ones approved by the board.
Restrictions on variable operating costs.

9. Operations-related Actions

The RBI may impose the following operations-related actions,

Restrictions on bank business expansions.
Restrictions on overseas branches or subsidiaries business.
Restrictions on initiating new avenues in business.
Restrictions in leverage on non-fund-based business
Restrictions on risky and non-credit assets.
Restrictions in outsourcing activities.
Restrictions on new borrowings.

10. Other Actions

Sparing the above actions, RBI has the authority to take any other activity that may fit a particular bank’s circumstances.