RBI Revises Prompt Corrective Action Framework For Commercial Banks

RBI Revises Prompt Corrective Action Framework For Commercial Banks

Recently the Reserve Bank of India (RBI) has revised the prescribed (PCA) Prompt Corrective Action framework for banks with effect from January 1, 2022.

RBI has revised the existing Prompt Corrective Action (PCA) bank framework for Scheduled Commercial Banks (SCBs).

It may be noted that this framework was last revised in April 2017.

Its objective is to control banks violating regulatory limits on bad loans and capital adequacy. Also, market discipline has to be ensured.

This framework will be applicable to all banks operating in India. These also include foreign banks operating through branches or subsidiaries. This framework is based on the breach of the risk limit of specified indicators.

The criteria set for exposure limits include capital, asset quality and dividend potential. These will be tracked through the Capital to Risk Weighted Assets to Capital Ratio (CRAR) / Common Equity Tier-Ratio, Net Non-Performing Assets Ratio and Tier- Leveraged Ratio, respectively.

In the 2017 framework, profitability criteria (measured through return on assets: ROA) were also included for determining the risk threshold. It is not included in the revised framework.

The three exposure limits will allow RBI to impose restrictions on dividend distribution, branch expansion, capital expenditure, etc.

Violation of any risk limit may result in the enforcement of the PCA.

Currently, Central Bank of India is under PCA.

Important Terminology

  • Capital adequacy ratio: CAR or CRAR is the ratio of a bank’s capital to its risk-weighted assets and liabilities.
  • When the principal or interest of a loan or advance is not paid for 90 days, that loan or advance is declared as NPA.
  • It is to be noted that the Tier 1 leverage ratio measures a bank’s gross capital versus its total assets. The higher the Tier 1 leverage ratio, the higher the bank’s ability to absorb negative shocks.
  • Tier 1 capital: It mainly consists of common stock, and disclosed reserves. However, it may also include preference stocks of a non-redeemable and non-cumulative nature.

Source – The Hindu


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