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

Regional Rural Banks (RRBs) can be placed under Prompt Corrective Action (PCA) framework by National Bank for Agriculture and Rural Development (NABARD). What is PCA and what does it mean for RRBs placed under PCA? 

What is Prompt Corrective Action (PCA) framework?

The primary focus of Prompt Corrective Action (PCA) framework is to ensure early rectification of the irregularities / deficiencies by self-corrective action of Regional Rural Banks (RRBs) and supervisory action by National Bank for Agriculture and Rural Development (NABARD). 

To which banks is PCA framework applicable?

The PCA framework applies to all RRBs operating in India.

What parameters are considered under PCA framework?

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

  1. Capital – indicated by Capital to Risk-Weighted Asset Ratio (CRAR) – the percentage of Capital to total risk-weighted assets.
  2. Asset Quality – indicated by Non-Performing Assets (NPA) ratio
  3. Profitability – indicated by Return on Assets (ROA)

What are the trigger points for invocation of PCA?

The breach of trigger points for any of the indicators of capital, asset quality or profitability may result in invocation of PCA framework.

Trigger points for Capital

Parameter Capital
Indicator Capital to Risk-Weighted Asset Ratio (CRAR)
Trigger point 1 Less than 9% but equal or more than 6%
Trigger point 2 Less than 6% but equal or more than 3%
Trigger point 3 Less than 3%

Trigger points for Asset Quality

Parameter Asset Quality
Indicator Non-Performing Assets (NPA) ratio
Trigger point 1 Net NPAs over 10% but less than 15% (in case of RRBs having retained profit) or
Gross NPAs over 10% but less than 15% (in case of RRBs having accumulated losses)
Trigger point 2 Net NPAs of 15% and above (in case of RRBs having retained profit) or
Gross NPAs of 15% and above (in case of RRBs having accumulated losses)

Trigger point for Profitability

ParameterProfitability
IndicatorReturn on Assets (ROA)
Trigger pointROA below 0.25%

What self-corrective action shall be taken by RRBs placed under PCA?

When a RRB is placed under PCA, following self-corrective action shall be taken by RRB –

Breach of trigger points for Capital

Trigger Point Corrective Action by RRBs
Trigger point 1 Submission of Board approved implementable action plan for capital restoration to NABARD RO.
Restriction on expansion of risk-weighted assets.
Review of the action plan on monthly / quarterly basis and submission of feedback to NABARD RO regularly.
Discretionary Action – Bank will not enter into new lines of business.
Trigger point 2 In addition to corrective action for trigger point 1 –
Discussion by the bank’s Board on corrective action plan with NABARD RO.
Discussion in and guidance of Empowered Committee for improvement in the working.
Bank to revise its credit / investment strategy and controls.
Trigger point 3 In addition to corrective action for trigger point 1 and 2 –
Sponsor bank may closely monitor the functioning of the bank.

Breach of trigger points for Asset Quality

Trigger Point Corrective Action by RRBs
Trigger point 1 Preparation of an implementable action plan with the approval of the Board for reduction of net NPAs to 3% and gross NPAs to 5%.
Revisiting the loan and recovery policies.
Identification of sector and area / branches which have high percentage of NPAs / Overdue.
Strengthening of follow-up mechanism of advances including loan review mechanism for large loans.
Up-gradation of credit appraisal skills and systems.
Effective follow-up of suit filed / decreed cases.
Bank will put in place credit risk management policies / process / procedures / prudential limit.
Review of the action plan on monthly / quarterly basis and submission of feedback to NABARD RO regularly.
Discretionary Action – Bank will not enter into new lines of business.
Trigger point 2 In addition to corrective action for trigger point 1 –
Discussion by the bank’s Board on corrective action plan with NABARD RO.
Discussion with sponsor bank to support the bank’s efforts in recovery.
Discussion in and guidance of Empower Committee of RBI for improvement in functioning.
Discretionary Action – Bank will not enter into new lines of business.

Breach of trigger point for Profitability

Trigger Point Corrective Action by RRBs
Trigger point Not to access / renew costly deposits.
Increase fee based income.
Contain administrative expenses.
Reduction of NPAs and contain generation of fresh NPAs.
Discretionary Action – Bank will not enter into new lines of business.

What supervisory action is taken by NABARD in respect of RRBs placed under PCA?

In case of absence of or despite self-corrective actions, the continuance of the incidence of prolonged / major irregularities and deficiencies in banks’ functioning will warrant supervisory action by NABARD as it deems fit viz., recommending to RBI for issuing directions / caution advices / show cause notices, imposition of penalty, etc., in the interest of the bank concerned and in the interest of its depositors.  


References

National Bank For Agriculture And Rural Development. (2018, March 16). 'Supervisory Action Framework (SAF) for RRBs – Prompt Corrective Action (PCA)'. Retrieved from https://www.nabard.org/CircularPage.aspx?cid=504&id=796#:~:text=In%20order%20to%20ensure%20financial,Action%20by%20RRBs%20and%20Supervisory


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