RBI unveils revised PCA framework

What is the news?

The Reserve Bank of India (RBI) has unveiled a revised PCA framework for Scheduled Commercial Banks (SCBs), and the changes will be effective from 1 Jan, 2022.

The framework was last revised in April 2017.

What changes have been made to the PCA framework?

RBI has made the following changes to its existing PCA framework:

– Profitability parameter excluded from its list of triggers. As per the 2017 PCA framework, capital, asset quality and profitability were the key areas for monitoring the risk of a bank.

– RBI has also revised the level of shortfall in total capital adequacy ratio that would push the lender to “risk threshold three” category. Lenders breaching this risk threshold have the most stringent restrictions placed under PCA.

– The indicators that will be tracked for capital, asset quality and leverage would be CRAR/ common equity tier I ratio 2 , net NPA ratio 3 and tier I leverage ratio 4 respectively.

– Payments banks and small finance banks (SFBs) have also been removed from the list of lenders where prompt corrective action can be initiated.

– In governance related actions, the RBI can supersede the board under Section 36ACA of the BR Act, 1949.

– The breach of any risk threshold may result in invocation of the PCA. The framework will apply to all banks operating in India, including foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.

– A bank will generally be placed under PCA framework based on the Audited Annual Financial Results and the ongoing Supervisory Assessment made by RBI.

Why the PCA framework has been revised?

The central bank’s revised PCA norms in 2017 had faced significant criticism, with some saying it led to a slowdown in credit flow.

In fact, in October 2018, RBI’s then deputy governor Viral Acharya had to defend the revised PCA norms.

Which banks are currently under PCA framework?

Following Indian Overseas Bank’s exit in September, only Central Bank of India now remains under PCA.

Source: This post is based on the article “RBI unveils revised PCA framework” published in Livemint on 3rd November 2021.