Prompt Corrective Action (PCA) framework

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Context:

The Reserve Bank of India (RBI) has placed 11 public sector banks (PSBs) out of 21 State-owned banks under its Prompt Corrective Action (PCA) framework because of deteriorating performance.

 

What is Prompt Corrective Action (PCA) framework?

  • PCA is a process or mechanism to ensure that banks don’t go bust.
  • Under it, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled.
  • It was first introduced after global economy incurred huge losses due to failure of financial institutions during 1980s-90s.
  • According to latest PCA framework, banks to be placed under it are assessed on three parameters viz. Capital ratios, Asset Quality and Profitability.
  • Indicators to be tracked for these three parameters are CRAR (Capital to Risk weighted Assets Ratio)/Common Equity Tier I ratio, Net NPA (non-performing assets) ratio and Return on Assets (RoA) respectively.
  • If banks breach of any risk threshold mentioned above, it results in invocation of PCA against them.
  • RBI enforces these guidelines to ensure banks do not go bust and follow prompt measures to put their house in order.
  • It had tightened its PCA framework in April 2017 to turn around lenders with weak operational and financial metrics,
  • Depending on the risk thresholds set in PCA rules, banks placed under it are restricted from expanding number of branches, staff recruitment and increasing size of their loan book.
  • Other restrictions include higher provisions for bad loans and disbursal only to those companies whose borrowing is above investment grades.

 

Key Facts

  • The 11 banks already under PCA framework are IDBI Bank, UCO Bank, Bank of India (BoI), Central Bank of India, Indian Overseas Bank, Dena Bank, Oriental Bank of Commerce (OBC), Bank of Maharashtra (BoM), United Bank of India, Corporation Bank and Allahabad Bank.
  • Since PCA framework restricts amount of loans banks can extend, placing 11 PSBs under it will put pressure on credit being made available to companies especially MSMEs.
  • Large companies have access to corporate bond market so they may not be impacted immediately.
  • These banks may take at least another 6-9 months before they report any noticeable improvement in key regulatory indicators, which will help them come out of PCA.

 

Impact of PCA:

  • Operational performance of PSBs has improved in April-June 2018 quarter, with steep reduction in net losses, increase in recoveries and significant improvement in provision coverage ratio.
  • Besides, government is also providing PSUs adequate capital when required.  
  • Some of capital already has been given, as recoveries is taking place and there is possibility that some banks will not need it.

ias4sure.com - PCA

Banks Board Bureau (BBB)

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  • BBB is super authority (autonomous body) of eminent professionals and officials for public sector banks (PSBs).
  • It was announced by Union Government in August 2015 as part of seven point Indradhanush Mission to revamp PSBs and started functioning in April 2016.
  • It had replaced Appointments Board of Government.
  • It is housed in Reserve Bank of India’s central office in Mumbai, Maharashtra.
  • BBB is considered as the first step towards Bank Investment Company as recommended by P J Nayak committee.
  • The first BBB was set up in February 2016 under chairmanship of former CAG Vinod Rai for two-year term that ended in March 2018.

 

Functions

  • Give recommendations for appointment of full-time Directors as well as non-Executive Chairman of PSBs.
  • Give advice to PSBs in developing differentiated strategies for raising funds through innovative financial methods and instruments and to deal with issues of stressed assets.
  • Guide banks on mergers and consolidations and governance issues to address bad loans problem among other issues.

 

Composition: BBB comprises of three ex-officio members (from government) and three expert members, two of which are from private sector in addition to Chairman.

Payment Banks

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  • Payment banks are non-full service banks, whose main objective is to accelerate financial inclusion.
  • Payment Banks concept allows mobile firms, supermarket chains and others to cater to banking requirements of individuals and small businesses to further enhance financial inclusion.
  • Payments banks will mainly deal in transfer and remittance services and accept deposits of up to Rs 1 lakh.
  • They will not lend to customers and will have to deploy their funds in government papers and bank deposits.
  • They can accept demand deposit, issue ATM/debit cards but not credit cards.
  • They also can distribute non-risk sharing simple financial products like mutual funds and insurance products.

Unified Payment Interface (UPI)

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What is UPI?
  • It is a common platform through which a person can transfer money from his bank account to any other bank account in the country instantly using nothing but his/her UPI ID.
  • It is developed by the National Payments Corporation of India (NPCI) under the guidelines of the RBI.
  • The interface will be based on the Immediate Payment Service (IMPS) platform.
 
How will it work?
  • A customer can transfer money to another person through a unique virtual address, or mobile number, or Aadhaar. Therefore, customers do not need to know the payee’s IFSC code, bank account details, etc. and this will make the process simpler.
  • A customer can have multiple virtual addresses for multiple accounts in various banks. There is no account number mapper anywhere other than the customer’s own bank. This allows the customer to freely share the financial address with others.

ias4sure.com - Unified Payment Interface (UPI)

 
Why in news?
Google has launched its own UPI app named “Tez”.

 

 

National Payments Corporation of India (NPCI)

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  • National Payments Corporation of India (NPCI) is an umbrella organization for all retail payments system in India.
  • It was set up with the guidance and support of the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA). 
  • It was incorporated as a Section 25 company under Companies Act 1956 (now Section 8 of Companies Act 2013) and is aimed to operate for the benefit of all the member banks and their customers.
  • Founded in 2008
  • It has successfully played pioneering role in development of a domestic card payment network called RuPay, reducing the dependency on international card schemes.