RBI issues revised PCA framework for banks

17 Apr 2017 Evaluate

Going by its promise to issue new guidelines to resolve the problem of banks' mounting non-performing assets (NPAs), the Reserve Bank of India (RBI) has issued the revised Prompt Corrective Action (PCA) framework with a view to tighten the norms on bank performance. The new provisions of the revised PCA framework will be effective from April 1, 2017 based on the financials of each bank as of March 2017, and override the existing PCA framework. Besides, the new framework will also be reviewed after three years.

As per the RBI notification the risk thresholds has been classified into three categories and breach of any risk threshold would result in invocation of PCA. Risk Threshold 1 will include action of restriction on dividend distribution/remittance of profits. In Risk Threshold 2, in addition to mandatory actions of Threshold 1, restriction on branch expansion; domestic and/or overseas can be taken, while in Risk Threshold 3, in addition to mandatory actions of Threshold 1, restriction on branch expansion; domestic and/or overseas can be taken, along with restriction on management compensation and directors’ fees, as applicable

Breach of risk threshold 3 will invite mandatory actions of threshold 1 & 2, along with restrictions on management compensation and directors' fees and any other corrective actions such as removal of managerial persons, superseding the board or suppression of the board. It also said that in the case of a default on the part of a bank in meeting the obligations to its depositors, possible resolution processes may be resorted to without reference to the PCA matrix.

The PCA framework would apply without exception to all banks operating in India including small banks and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators. Furthermore, based on the audited financial results and RBI's supervisory assessment, a bank will be placed under PCA framework. However, RBI may impose PCA on any bank during the course of a year, including migration from one threshold to another, in case the circumstances so warrant.

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