On March 10, 2021, The Reserve Bank of India (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.
The process behind the removal from the PCA framework:
- RBI has decided to conduct a review on IDBI Bank by the Board for Financial Supervision(BFS) on February 18, 2021
- The board reviewed the results published for the December quarter and stated that the Bank is not breaching the PCA parameters on Regulatory capital, Net NPA, and Leverage Ratio.
- The bank has provided a written commitment that it would comply with the norms of the PCA Framework
- By taking all the above into consideration RBI decided to take them out of the PCA framework with certain conditions and continuous monitoring.
Points to be noted:
- IDBI eases the bank rules, expands their business, and allows divestment by the government which holds a 45.48 % stake in the firm.
- IDBI’s progress: The Net NPAs of them was around 5.25% and 1.94% in the December quarter of the previous and current fiscal.
- After breaching the thresholds for capital adequacy, asset quality, return on assets, and leverage ratio IDBI Bank was placed under the PCA framework by RBI in May 2017.
- Their NPA was over 13% (breaching Threshold 3) in March 2017
- LIC had completed acquiring a 51% stake in IDBI Bank in January 2019, after it was approved by the Union cabinet in August 2018.
PCA Framework and its regulations:
- It was introduced in December 2002 as a structured early intervention mechanism along the lines of the Federal Deposit Insurance Corp.’s (FDIC) PCA framework. These regulations were later revised in April 2017.
- Under which banks with weak financial metrics are put under watch by the RBI.
- The PCA framework is applicable only to commercial banks and not extended to co-operative banks, Non-banking Financial Companies (NBFCs), and Financial Market Infrastructures (FMI).
Four important parameters under PCA:
- The PCA framework deems banks as risky if they slip some trigger points from the following 4 parameters – capital to risk-weighted assets ratio (CRAR), net NPA, Return on Assets (RoA), and Tier 1 Leverage ratio.
- It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios initiation of certain structured and discretionary actions invokes a corrective action plan.
Parameter of PCA
|Threshold 1||Threshold 2||Threshold 3|
|CRAR||<10.25% but >=7.75%||<7.75% but >=6.25%||Below 3.625%|
|NPA||>=6% but < 9%||>=9% but <12%||12% and above|
|ROA(Negative return on assets for)||2 years||3 years||4 years|
|Tier1 Leverage ratio||<=4% but > = 3.5%||< 3.5%|
- CRAR- Capital to risk-weighted assets ratio
- NPA – Net Non-Performing Assets
- ROA – Return On Assets
- Leverage Ratio – added in 2017 after PCA framework’s revision.
Note – RBI in 2019 minimized the Leverage Ratio to 4% for Domestic Systemically Important Banks (DSIBs) and 3.5% for other banks.
RBI’s Corrective Action:
- Depending on the threshold levels, the RBI can place restrictions on dividend distribution, branch expansion, and management compensation.
- Only in breach of the third threshold, would go for resolution through amalgamation, reconstruction, or winding up.
Recent Related News:
On February 17, 2021, the Reserve Bank of India (RBI) has issued “Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021” in the exercise of the powers conferred under sections 45L and 45MA of the Reserve Bank of India Act, 1934 and Sections 30, 30A, 32 and 33 of the National Housing Bank Act, 1987.
About Reserve Bank of India (RBI):
Established – 1st April 1935
Headquarters– Mumbai, Maharashtra
Governor– Shaktikanta Das
Deputy Governors– 4 (Bibhu Prasad Kanungo, Mahesh Kumar Jain, Michael Debabrata Patra, and M Rajeswar Rao)
About Industrial Development Bank of India (IDBI):
Chairman– MR Kumar
MD & CEO– Rakesh Sharma
Headquarter– Mumbai, Maharashtra
Tagline – Bank Aisa Dost Jaisa