Prompt Corrective Action (PCA)

What is Prompt corrective action(PCA)?

• PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.
• The RBI introduced the PCA framework in 2002 as a structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.
• These regulations were revised in April 2017.
• It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.

When is PCA invoked?

• RBI uses PCA framework to rein in banks that have breached certain regulatory thresholds in bad loans and capital adequacy.
• PCA entails curbs on high-risk lending, setting aside more money on provisions and restrictions on management salary.
• There are three risk thresholds which are based on certain levels of asset quality, profitability, capital and net non performing assets(NPA) ratio.

Types of restrictions

• There are two types of restrictions mandatory and discretionary restrictions.
• The restrictions on dividends, branch expansion, directors compensation are mandatory while discretionary restrictions could include curbs on lending and deposit.
• RBI may also place restrictions on credit by PCA banks to unrated borrowers or those with high risks but it doesn’t invoke a complete ban on their lending.
• RBI may also impose restrictions on the bank on borrowings from interbank market.
• Further, the banks may also not be allowed to enter into new lines of business.

Additional information:

Non Performing Asset(NPA):

• A non performing asset (NPA) is a loan or advance for which the principal or interest payment remains overdue for a period of 90 days. 
• The banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.