Prompt Corrective Action framework of RBI

Four public sector banks — Bank of Maharashtra, Corporation Bank, Allahabad Bank and Bank of India — that are under the Prompt Corrective Action (PCA) framework of the Reserve Bank of India (RBI), may come out of the restrictions following improved performance.

What is PCA?

• PCA norms allow the regulator to place certain restrictions such as halting branch expansion and stopping dividend payment. It can even cap a bank’s lending limit to one entity or sector.
• Other corrective action that can be imposed on banks include special audit, restructuring operations and activation of recovery plan. Banks’ promoters can be asked to bring in new management, too. The RBI can also supersede the bank’s board, under PCA.
• The provisions of the revised PCA framework came into effect on April 1, 2017 and it will be reviewed after three years.

When PCA is invoked

• It is invoked when certain risk thresholds are breached. There are three risk thresholds which are based on certain levels of asset quality, profitability, capital and the like. The third such threshold, which is maximum tolerance limit, sets net NPA at over 12% and negative return on assets for four consecutive years.

Types of sanctions

• There are two type of restrictions, mandatory and discretionary. Restrictions on dividend, branch expansion, and directors’ compensation are mandatory while discretionary restrictions could include curbs on lending and deposit. In the cases of two banks where PCA was invoked after the revised guidelines were issued — IDBI Bank and UCO Bank — only mandatory restrictions were imposed. Both the banks breached risk threshold 2.

Implications

• Some more lenders are expected to come under the corrective action framework as their asset quality worsens. Some public sector banks have breached the net NPA parameter as well as the profitability parameter.
• Government’s commitment to ensure the PSU banks are not starved of capital; have made banks comfortable on the capital parameter. However, for maintaining fiscal discipline, it can’t afford to infuse capital in long run.

Public Sector banks under PCA

• The RBI, so far, has put 11 PSBs under PCA with different degree of restrictions. These 11 banks are IDBI, Indian Overseas Bank, Bank of Maharashtra, United Bank of India, Dena Bank, Corporation Bank, UCO Bank, Central Bank of India, Oriental Bank of Commerce and Bank of India.

Why it was in news

• A tug of war is currently going on between RBI and government over PCA norms for the Public Sector Banks. The Finance Ministry wants the central bank to relax its norms to enable more sanction of credit by PSU Banks, while the RBI wants to continue with tighter norms due to high non-performing assets (NPAs) ratio.
• Rating agencies like Fitch have hailed the RBI’s decision to put stricter norms, saying that it would address the problems of struggling banks.
• However, the government is of the opinion that the RBI should relax the PCA norms so that banks get to lend more amid the liquidity crunch in NBFCs following the crisis at Infrastructure Leasing and Financial Services (IL&FS).