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When are banks placed under PCA? What are its implications?

We sometimes come across news headlines about some bank being placed under Prompt Corrective Action (PCA) framework by Reserve Bank of India (RBI). What is this PCA framework? And what does it mean for banks placed under PCA?

What is Prompt Corrective Action (PCA) framework?

Prompt Corrective Action (PCA) framework enables detection of deteriorating financial health of a bank and requires the bank to initiate and implement remedial measures for its timely restoration. 

To which banks is PCA framework applicable?

The PCA framework applies to all Scheduled Commercial Banks (Excluding Small Finance Banks, Payment Banks and Regional Rural Banks) operating in India including foreign banks operating through branches or subsidiaries.

What parameters are considered under PCA framework?

For the purpose of PCA framework, the financial health of a bank is evaluated in terms of following 3 parameters –

  1. Capital – indicated by CRAR / CET-1 Ratio
  2. Asset Quality – indicated by Net NPA Ratio
  3. Leverage – indicated by Tier-1 Leverage Ratio 

How are these indicators measured?

  • Capital to Risk-Weighted Asset Ratio (CRAR) – the percentage of Capital to total risk-weighted assets.
  • Common Equity Tier-1 (CET-1) ratio – the percentage of common equity capital (net of regulatory adjustments) to total risk-weighted assets as defined in RBI Basel III guidelines.
  • Net Non-Performing Assets (NNPA) ratio – the percentage of net NPAs to net advances.
  • Tier-1 Leverage ratio – the percentage of the capital measure to the exposure measure as defined in RBI guidelines on Leverage ratio.

What are the thresholds for invocation of PCA?

The breach of risk thresholds for any of the indicators of capital, asset quality or leverage may result in invocation of PCA framework.

Risk thresholds for Capital

Parameter Capital
Indicator Capital to Risk-Weighted Asset Ratio (CRAR) Common Equity Tier-1 (CET-1) ratio
Minimum regulatory prescription for CRAR + applicable Capital Conservation Buffer (CCB) Regulatory Pre-Specified Trigger of CET-1 ratio + applicable Capital Conservation Buffer (CCB)
Risk Threshold 1 Up to 250 bps below the Indicator prescribed Up to 162.50 bps below the Indicator prescribed
Risk Threshold 2 More than 250 bps but not exceeding 400 bps below the Indicator prescribed More than 162.50 bps below but not exceeding 312.50 bps below the Indicator prescribed
Risk Threshold 3 In excess of 400 bps below the Indicator prescribed In excess of 312.50 bps below the Indicator prescribed
Breach of either CRAR or CET-1 ratio will trigger PCA

Risk thresholds for Asset Quality

Parameter Asset Quality
Indicator Net Non-Performing Assets (NNPA) ratio
Risk Threshold 1 ≥ 6.0% but < 9.0%
Risk Threshold 2 ≥ 9.0% but < 12.0%
Risk Threshold 3 ≥ 12.0%

Risk thresholds for Leverage

ParameterLeverage
IndicatorRegulatory minimum Tier-1 Leverage Ratio
Risk Threshold 1Up to 50 bps below the regulatory minimum
Risk Threshold 2More than 50 bps but not exceeding 100 bps below the regulatory minimum
Risk Threshold 3More than 100 bps below the regulatory minimum

What is the data point for assessing the risk thresholds?

The risk thresholds are generally assessed based on the Audited Annual Financial Results and the ongoing Supervisory Assessment made by RBI. If required, PCA framework may also be imposed on any bank during the year (including migration from one threshold to another).

What mandatory restrictions are imposed on banks placed under PCA?

When a bank is placed under PCA, one or more of the following mandatory corrective actions may be prescribed for banks –

SpecificationsMandatory actions
Risk Threshold 1Restriction on dividend distribution / remittance of profits.
Promoters / Owners / Parent (in the case of foreign banks) to bring in capital
Risk Threshold 2In addition to mandatory actions of Threshold 1 – Restriction on branch expansion; domestic and / or overseas
Risk Threshold 3In addition to mandatory actions of Threshold 1 and 2 – Appropriate restrictions on capital expenditure, other than for technological upgradation within Board approved limits

What discretionary actions can be taken for banks placed under PCA?

When a bank is placed under PCA, one or more of the following discretionary corrective actions may be prescribed for banks –

  1. Special Supervisory Actions
  2. Strategy related
  3. Governance related
  4. Capital related
  5. Credit risk related
  6. Market risk related
  7. HR related
  8. Profitability related
  9. Operations / Business related
  10. Any other

When can banks exit PCA restrictions?

Taking a bank out of PCA framework and / or withdrawal of restrictions imposed under PCA framework can be considered –

  1. If no breaches are observed in risk thresholds of any of the parameters as per the four continuous quarterly financial statements, one of which should be Audited Annual Financial Statement (subject to assessment by RBI); and 
  2. Based on Supervisory comfort of RBI, including an assessment on sustainability of profitability of the bank.


References

Reserve Bank of India. (2021, November 02). 'Prompt Corrective Action (PCA) Framework for Scheduled Commercial Banks'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12186


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Comments

  1. AnonymousMay 2, 2023 at 11:32 PM

    Please share a write up on "When are UCBs placed under All Inclusive Directions and what are its implications"

    ReplyDelete
    Replies
    1. Inquisitive MindMay 6, 2023 at 6:57 PM

      Check this article https://inquisitivemind5.blogspot.com/2023/05/when-are-ucbs-placed-under-saf-what-are.html. Hope this helps.

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