Skip to main content

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

Reserve Bank of India (RBI) has issued Prompt Corrective Action (PCA) framework for Primary (Urban) Co-operative Banks (UCBs).

What is Prompt Corrective Action (PCA) framework?

Prompt Corrective Action (PCA) framework enables supervisory intervention at an appropriate time and requires the Primary (Urban) Co-operative Banks (UCBs) to initiate and implement remedial measures in a timely manner, to restore their financial health. 

To which UCBs is the PCA framework applicable?

The PCA framework shall be applicable to all UCBs under Tier 2, Tier 3 and Tier 4 categories except UCBs under All Inclusive Directions (AID). 

The PCA framework will replace the existing Supervisory Action Framework (SAF) and will be effective from April 01, 2025.

How are UCBs categorized?

UCBs have been categorized into –

  • Tier 1 - All unit UCBs and salary earners’ UCBs (irrespective of deposit size), and all other UCBs having deposits up to ₹100 crore
  • Tier 2 - UCBs with deposits more than ₹100 crore and up to ₹1,000 crore
  • Tier 3 - UCBs with deposits more than ₹1,000 crore and up to ₹10,000 crore
  • Tier 4 - UCBs with deposits more than ₹10,000 crore

The deposits are reckoned as per audited balance sheet as on 31st March of the preceding financial year.

What parameters are considered under PCA framework?

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

  • Capital – indicated by CRAR
  • Asset Quality – indicated by Net NPA Ratio
  • Profitability – indicated by Net Profit

How are the indicators measured?

  • Capital to Risk-Weighted Asset Ratio (CRAR) – the percentage of Capital to total risk-weighted assets.
  • Net Non-Performing Assets (NNPA) ratio – the percentage of net NPAs to net advances.

What are the thresholds for invocation of PCA?

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

Risk thresholds for Capital

Parameter Capital
Indicator CRAR – minimum regulatory requirement, as applicable (For Tier 2 to 4 UCBs as per the glide path provided for achieving the regulatory minimum CRAR of 12% by March 31, 2026)
Risk Threshold 1 Up to 250 bps below the Indicator prescribed
Risk Threshold 2 More than 250 bps but not exceeding 400 bps below the Indicator prescribed
Risk Threshold 3 In excess of 400 bps below the Indicator prescribed

Risk thresholds for Asset Quality

Parameter Asset Quality
Indicator Net NPA 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 Profitability

Parameter Profitability
Indicator Net profit
Risk Threshold 1 Incurred losses during 2 consecutive years
Risk Threshold 2 -
Risk Threshold 3 -

What is the data point for assessing the risk thresholds?

A bank will generally be placed under PCA framework based on the Reported / Audited Annual Financial Results and / or the ongoing Supervisory Assessment made by RBI. However, RBI may impose PCA on any bank during the course of a year (including migration from one threshold to another) in case the circumstances so warrant. 

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 –

Specifications Mandatory actions
Risk Threshold 1 Bank to raise capital either from existing members or by issuance of equity and other permissible capital instruments
Restriction on declaration / payment of dividend / donation
Appropriate restrictions on capital expenditure, other than for technological upgradation
Risk Threshold 2 In addition to mandatory actions of Threshold 1 – Restriction on branch expansion
Risk Threshold 3 In addition to mandatory actions of Threshold 1 and 2 – Appropriate restrictions / prohibition on expansion of total size of the deposits

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. Imposition of All Inclusive Directions / Cancellation of Banking License
  11. Any other

When can banks exit PCA restrictions?

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

  • 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 
  • Based on Supervisory comfort of RBI, including an assessment on sustainable improvement in key financials of the bank.

How is PCA different from existing SAF?

  • The PCA framework is largely principle-based with fewer number of parameters as compared to the SAF.
  • The revised framework seeks to provide flexibility to design entity specific supervisory action plans based on the assessment of risks on a case-by-case basis.
  • The hard-coded limit of ₹25,000/- for restrictions on capital expenditure by UCBs under SAF has been dispensed with. The revised framework enables the Supervisors to decide the limit depending upon their assessment of each entity.
  • Tier 1 UCBs have been excluded from the PCA framework for the present. However, they shall continue to be subjected to enhanced monitoring under the extant supervisory framework.
  • The revised framework is expected to give more focus on the larger UCBs.


References

Reserve Bank of India. (2022, December 01). 'Revised Regulatory Framework - Categorization of Urban Co-operative Banks (UCBs) for Regulatory Purposes'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12416&Mode=0

Reserve Bank of India. (2024, July 26). 'Prompt Corrective Action (PCA) Framework for Primary (Urban) Co-operative Banks (UCBs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12711&Mode=0

Reserve Bank of India. (2024, July 26). 'RBI issues Prompt Corrective Action (PCA) Framework for Primary (Urban) Co-operative Banks'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=58375


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Special Rupee Vostro Accounts (SRVAs)

Reserve Bank of India (RBI) has consolidated the guidelines governing Special Rupee Vostro Accounts (SRVAs). Who can open and maintain Special Rupee Vostro Accounts (SRVAs)? Authorised Dealer (AD) banks in India may open Special Rupee Vostro Accounts (SRVAs) of its branch outside India or a bank resident outside India. Which transactions can be settled through SRVA? The settlement of cross-border trade transactions through SRVA is an additional arrangement for invoicing, payment and settlement of exports and imports in Indian Rupee (INR).  All permissible capital and current account transactions under Foreign Exchange Management Act (FEMA) may be settled through the SRVA.  AD banks maintaining SRVA are permitted to open additional current account for exporter / importer, exclusively for settlement of export / import transactions. What can be the source and use of funds in SRVA? SRVA may be funded by way of inward remittances or transfer from other repatriable INR accounts in t...
Post a Comment
Read more

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

Reserve Bank of India (RBI) has issued the directions on maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) by banks. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Payments Banks (PBs) Local Area Banks (LABs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) District Central Co-operative Banks (DCCBs) What is CRR? Every bank shall maintain in India by way of cash reserve, a sum equivalent to such percent of its Net Demand and Time Liabilities (NDTL) in India, as the RBI in terms of Section 42(1) of the RBI Act, 1934 (for scheduled banks) and Section 18(1) of the Banking Regulation Act (BR Act), 1949 (for non-scheduled banks) [including provisions of Section 18(1) of the BR Act as applicable to co-operative banks], may specify. What is incremental CRR? In terms of Secti...
Post a Comment
Read more

Highlights of RBI Annual Report 2025-26 – Chapter 7 to 12

Reserve Bank of India (RBI) has published its annual report for the financial year 2025-26. In a series of articles, we will go through the highlights of the report. This is the fifth and final article in the series.  Chapter 7 – Public Debt Management The ways and means advances (WMA) limit for the Government of India (GoI) for H1:2025-26 (April to September 2025) was fixed at ₹1,50,000 crore and for H2:2025-26 (October 2025 to March 2026) was fixed at ₹50,000 crore. The RBI entered into an agreement with the Government of National Capital Territory of Delhi (GNCTD), under Section 21A(1) of the RBI Act, 1934, to carry on the general banking business of GNCTD and manage its rupee public debt. The WMA limit of GNCTD was set at ₹890 crore, taking the aggregate WMA limit of all the states / UTs to ₹61,008 crore. The RBI introduced Separate Trading of Registered Interest and Principal of Securities (STRIPS) in the state government securities. Retail Direct Gilt (RDG) account – An au...
Post a Comment
Read more

Payment of Agency Commission to Agency Banks (ABs) and Disbursement of Government Pension by ABs

Reserve Bank of India (RBI) has issued guidelines on the conduct of Government business by Agency Banks (ABs), payment of agency commission to ABs and disbursement of Government pension by ABs. Who are ABs? ABs mean all Public Sector Banks (PSBs), scheduled Private Sector Banks (PVBs), scheduled Payments Banks (PBs), and scheduled Small Finance Banks (SFBs) appointed by the RBI under Section 45 of the RBI Act, 1934, by mutual agreement, to carry out Government banking business of the Central Government (CG) / State Governments (SGs). What is agency commission? Agency commission means the remuneration paid by the RBI to an AB in consideration of it acting as an agent of the RBI in the conduct of general banking business of the CG and the SGs at the places and in the manner specified in the agreement between the RBI and the bank, with the exception of the functions relating to the management of the public debt. What are the guidelines on appointment of ABs? Any eligible bank which intend...
Post a Comment
Read more

Policies to be formulated by NBFC-BL

Non-Banking Financial Companies (NBFCs) are required to formulate various policies for effective corporate governance and operations. This article lists out some of the important policies to be formulated by the Base Layer NBFCs (NBFC-BL). Business Model Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 dated October 19, 2023 Para 1.1 of Annex II – In view of the criticality of the nature of the business model in determining the classification of financial assets and restrictions on subsequent reclassification, NBFCs are advised to put in place Board approved policies that clearly articulate and document their business models and portfolios. Para 1.2 of Annex II – NBFCs shall frame their policy for sales out of amortised cost business model portfolios. Expected Credit Losses (ECL) Policy Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 dated October 19, 202...
Post a Comment
Read more