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RBI Issues Revised PCA framework for Banks

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RBI unveils revised PCA frameworkOn November 02, 2021, the Reserve Bank of India (RBI) reviewed and revised the existing PCA (Prompt Corrective Action) framework for all Scheduled Commercial Banks (SCBs) excluding Small Finance Banks, Payment Banks and Regional Rural Banks.

  • Under the revised framework, Capital, Asset Quality and Leverage will act as the key areas for monitoring. (Capital, Asset quality and Profitability were the key areas for monitoring in 2017’s framework).
  • The provisions of the revised PCA Framework will be effective from January 1, 2022.

Revised PCA Framework:

 

Parameter

 

Indicator

 

Risk Threshold 1            

 

Risk 

Threshold 2

 

Risk Threshold 3

 

Capital

(Breach of either CRAR or Common Equity Tier 1 ratio)

CRAR – Minimum regulatory prescription for CRAR + applicable CCB

 

and/or

 

Regulatory Pre-Specified Trigger of Common Equity Tier 1 Ratio (CET 1 PST) + applicable CCB

 

Up to 250 bps (basis points) below the prescribed Indicator

 

Up to 162.50 bps below the prescribed Indicator

More than 250 bps but not exceeding 400 bps below the prescribed Indicator

 

More than 162.50 bps below but not exceeding 312.50 bps below the prescribed Indicator

 

In excess of 400 bps below the prescribed Indicator

 

In excess of 312.50 bps below the prescribed Indicator

 

Asset Quality

Net Non-Performing Advances (NNPA) ratio  

>=6.0% but <9.0%

 

>=9.0% but < 12.0%

 

>=12.0%

 

Leverage

 

Regulatory minimum Tier 1 Leverage Ratio

 

Upto 50 bps below the regulatory minimum

More than 50 bps but not exceeding 100 bps below the regulatory minimum  

More than 100 bps below the regulatory minimum

CARA – Capital to Risk (Weighted) Assets Ratio; CCB – Capital Conservation Buffer

Mandatory actions for breaching the threshold:

Specifications

Mandatory actions

 

Risk Threshold 1

Restriction on dividend distribution/remittance of profits.
Promoters/Owners/Parent (in the case of foreign banks) to bring in capital
 

Risk Threshold 2

Mandatory actions of Threshold 1 and

Restriction on branch expansion; domestic and/or overseas

 

Risk Threshold 3

Mandatory actions of Threshold 1 & 2 and Restrictions on capital expenditure, other than for technological upgradation within Board approved limits

About PCA Framework:

What is PCA?

i.PCA is a framework under which banks with weak financial metrics are put under watch by the RBI. Under the Framework, the supervised Entity will be required to initiate and implement remedial measures in a timely manner to restore its financial health.

ii.The RBI introduced the PCA framework in December 2002 as a structured early-intervention mechanism to supervise and regulate the banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.

iii.The regulations were later revised in April 2017.

Features of PCA Framework:

i.The PCA Framework will also act as a tool for effective market discipline and it does not prevent the RBI from taking any other action as it deems fit at any time, in addition to the corrective actions prescribed in the Framework.

ii.A bank will be placed under PCA framework based on the Audited Annual Financial Results and the ongoing Supervisory Assessment made by RBI.

Note – Following Indian Overseas Bank’s exit from PCA in September 2021, Central Bank of India was the only bank that was remaining under PCA.

Recent Related News:

On March 10, 2021, RBI removed LIC – owned Industrial Development Bank of India (IDBI) from its enhanced regulatory supervision, the Prompt Corrective Action (PCA) framework, after almost 4 years, on improved financial performance and credit profile.