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

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