As the name suggests this term has been devised by RBI to take immediate corrective actions on banks to ensure that they don't get bust. The need of PCA dates backs in 1980s and early 1990s when there was great turmoil in banking and financial sector accros the globe. RBI has put some trigger points to assess, monitor, control and take corrective actions on banks which are weak. This mechanism under which such actions are taken is known as Promt Corrective Action or PCA.
PCA helps in identifying weak banks in terms of indicators like poor asset quality, insufficient capital and profits. PCA framework specifies levels in which RBI will take corrective actions. The Trigger points are: Capital to Risk weighted Asset Ratio (CRAR), Net Non-performing Assets (NNA), Return on Assets (RoA), and Leverage Ratio.
SO if a bank is reporting low level of CRAR and high NPA, then RBI will ask the banks to adopt certain restrictive measure.
What the banks under PCA do? -
When a bank is brought into the PCA, it faces restrictions on distribution of dividends, remitting profits and even on accepting deposits. There are also restrictions on the expansion of branch network. The entire trust of the PCA framework is to prevent further capital erosion and to bring back the bank to normal healthy conditions.
Some of the discretionary actions that could be taken by RBI are: recapitalization, restrictions on borrowing from inter-bank market.
The corrective actions are tough with worsening of financials. As on March 9, 2019, there are 6 banks under PCA framework. All these banks are PSBs namely Dena Bank, United Bank of India, IDBI, UCO, Central Bank of India and Indian Overseas Bank.
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Author - Sakshi Lunia
Kautilya
IBS Mumbai
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