Prompt corrective action (PCA)

Why in news?

• The Reserve Bank of India (RBI) has decided to impose restrictions on urban cooperative banks (UCBs) for deterioration of financial position, in line with the prompt corrective action (PCA) framework that is imposed on commercial banks.

About PCA:

• Prompt Corrective Action or PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.
• The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital to risk weighted assets ratio (CRAR), net non-performing assets (NPA ) and Return on Assets (RoA).
• It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios.
• Previously, the PCA framework was applicable only to commercial banks and not extended to co-operative banks, non-banking financial companies (NBFCs)and FMIs. Now urban cooperative banks (UCBs) will also fall under its ambit.
• PCA helps RBI monitor key performance indicators of banks, and taking corrective measures, to restore the financial health of a bank.
• On breach of any of the risk thresholds, the RBI can invoke a corrective action plan.
• Depending on the threshold levels, the RBI can place restrictions on dividend distribution, branch expansion, and management compensation.
• Only in an extreme situation, breach of the third threshold, would identify a bank as a likely candidate for resolution through amalgamation, reconstruction or winding up.

Prelims Question

Regarding Prompt Corrective Action (PCA), which of the following statements is/are correct?
1.PCA framework is implemented by the RBI.
2.It is applicable only to commercial banks.
Select the correct answer using the code given below:
(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 nor 2

Answer to the Prelims Question