Prompt corrective action(PCA) Framework – UPSC Prelims

What is Prompt corrective action(PCA) Framework?
  • PCA is an RBI framework. Banks with weak financial metrics are put under the PCA framework by the Reserve Bank of India(RBI).
  • Aim: It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.
When was the PCA framework introduced?
  • The RBI introduced the PCA framework in 2002. It is a structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.
When does RBI invoke PCA?
  • The PCA framework is invoked when banks breach any of the three key regulatory trigger points namely
    • Capital to risk-weighted assets ratio
    • Net non-performing assets(NPA) and
    • Return on assets(RoA).
What are the restrictions on Banks when PCA is invoked? 
There are two types of restrictions:
Mandatory Restrictions: It includes:
  • Restrictions on Dividends
  • Restrictions on Branch expansion
  • Restrictions on Management compensation among others.
Discretionary Restrictions: It includes
  • Curbs on lending and deposits.
  • Recommending the bank owner to bring new management and board among others.
PCA for NBFCs:
  • RBI has extended PCA to cover NBFCs.
  • The PCA Framework for NBFCs has been brought after four big finance firms: IL&FS, DHFL, SREI and Reliance Capital, which collected public funds through fixed deposits and non-convertible debentures collapsed in the last three years despite the tight monitoring in the financial sector. They collectively owe over Rs 1 lakh crore to investors.

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