On 26th July 2024, the Reserve Bank of India (RBI) introduced new Prompt Corrective Action (PCA) framework for Urban Co-operative Banks (UCBs) to provide more focus on larger UCBs that require more intensive monitoring by optimal utilisation of supervisory resources. Its provisions will be effective from 1st April 2025.
- This will replace the Supervisory Action Framework (SAF), which had been in place since 6th January 2020.
- This aims to enable supervisory intervention at an appropriate time and require the UCBs to initiate and implement remedial measures in a timely manner, which will help them to restore their financial health.
- It seeks to offer flexibility to design entity specific supervisory action plans based on the evaluation of risks on a case-by-case basis.
UCB in India:
i.At present, there are around 1500 UCBs in the country.
ii.RBI has classified UCBs into 4 categories depending upon their deposits such as:
- Tier-1: UCB with deposits up to Rs 100 crore.
- Tier-2: UCB with deposits more than Rs 100 crore and up to Rs 1000 crore.
- Tier-3: UCB with deposits more than Rs 1,000 crore and up to Rs 10,000 crore.
- Tier-4: UCB with deposits more than Rs 10,000 crore.
Key Features:
i.The framework is largely principle-based with fewer number of parameters as compared to the SAF, without any dilution in the supervisory rigour.
ii.As per new framework , capital, asset quality and profitability will be the key areas for monitoring the financial health of the UCBs.
iii.The PCA framework eliminates the limit of Rs 25,000 on capital expenditure restrictions that was imposed under the SAF.
- This will give autonomy to Supervisors to set the limits based on the evaluation of individual entities.
iv.The provisions of new PCA framework will be applicable to all UCBs in tier-1, tier-2, tier-3 and tier-4 categories, with exception of those under All Inclusive Directions (AID).
- Also, tier-1 UCBs will not be covered by the new framework but will continue to be monitored under the current supervisory framework.
Conditions:
i.RBI has prescribed 3 risk thresholds for invoking PCA for breach of CRAR (10% as of March-end 2024, 11% as of March-end 2025 and 12% as of March-end 2026) below the regulatory minimum – up to 250 basis points (bps); more than 250 bps but not exceeding 400 bps; and more than 400 bps.
ii.As per PCA framework, UCBs from all tiers, except UCB of tier-1 which are registering 2.5% to 4% lower CRAR than the minimum requirement of 9%, will be placed under PCA.
- RBI has allowed tier-2 to tier-4 UCBs to achieve the regulatory minimum CRAR of 12% by 31st March, 2026.
iii.RBI has prescribed UCBs with more than 6% to 12% of Net Non-Performing Assets (NNPA) ratio will be placed under PCA framework.
iv.Incase of Profitability, UCBs which have been registering net losses for 2 consecutive years will be place under PCA framework.
Implications:
i.RBI will impose stringent business restrictions on the bank, if a UCB is placed under the PCA framework such as: imposing restrictions on UCB from raising capital from existing members and issuing equity or other capital instruments..
ii.The RBI will also restricts UCBs from giving dividends to shareholders or making other donations; appropriated restrictions on capital expenditure, other than for technology upgradation.
iii.RBI can also restrict UCB to expand branch and curtail expansion in total size of deposits.
iv.UCBs under PCA will be required to activate an action plan which need to be approved by the RBI.
- RBI will undertake a detailed review of the business model in terms of sustainability, profitability of business lines and activities, medium and long-term viability, among others; restrict expansion of the size of the balance sheet.
v.If steps taken by UCB fails to yield the desired result, then UCB will be required to explore merger options with another bank or converting itself into a credit society but that also need the approval of the Board of the UCB.
About PCA:
i.PCA is a framework used by the RBI to assess the financial health and stability of banks. Its primary objective is to ensure that banks maintain sound financial conditions and take corrective actions when their financial health deteriorates.
ii.Initially, the RBI introduced the PCA framework for Scheduled Commercial Banks (SCBs) in December 2002.
- This structured system was inspired by a similar framework used by the United States of America (USA) Federal Deposit Insurance Corporation (FDIC) PCA framework.
iii.PCA framework was revised in April 2017, with a focus on monitoring capital, asset quality, and leverage.
iv.In 2021, the RBI extended the framework for Non-Banking Financial Companies (NBFCs).
About Reserve Bank of India(RBI):
Governor– Shaktikanta Das (25th Governor of RBI)
Headquarter– Mumbai, Maharashtra
Established–1 April, 1935
