Prompt Corrective Action Framework

Syllabus: General Studies Paper 3

The Reserve Bank of India (RBI) removed Central Bank of India from its Prompt Corrective Action Framework (PCAF) after the lender showed improvement in various financial ratios, including minimum regulatory capital and net non-performing assets (NNPAs).

Prompt Corrective Action

• The PCA norm is a supervisory tool and is imposed when a bank breaches certain regulatory thresholds on capital to risk weighted assets ratio (CRAR), net NPAs and return on assets (RoA).
• PCA delineates three risk thresholds. Triggering of each threshold will result in invocation of PCA, with a gradually increasing set of restrictions.

With the first risk threshold breached,

• The RBI can restrict dividend distribution, or remittance of profits
• The promoters and shareholders of the NBFCs will be asked to put in more capital.
• The RBI will also restrict issuance of guarantees or taking other contingent liabilities on behalf of group companies, in case of core investment companies.

After hitting risk threshold 2, 

• The NBFC will be prohibited from opening branches, in addition to restrictions under Threshold 1.

If the third risk threshold is triggered, 

• The RBI can even restrict capital expenditure. 
• There are other discretionary actions that the RBI can take, for example, special supervisory actions, or even removing the key executives.
• It is also important to note that apart from the actions mentioned in the PCA framework, the RBI can take any other action as it deems fit at any time.
• Aim: to initiate and implement remedial measures in a timely manner, so as to restore its financial health.
• Scope: Apply to all banks operating in India including foreign banks operating through branches or subsidiaries.

Conditions for Withdrawal of restrictions imposed:

• if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements
• based on Supervisory comfort of the RBI, including an assessment on sustainability of profitability of the bank.