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RBI unveils revised PCA framework – Mint


The Reserve Bank of India (RBI) on Tuesday tweaked its prompt corrective action (PCA) framework to exclude the profitability parameter from its list of triggers.

While capital, asset quality and profitability were the key areas for monitoring in 2017’s framework, this time round capital, asset quality and leverage will be key areas. That apart, RBI has also revised the level of shortfall in total capital adequacy ratio that would push the lender to “risk threshold three” category. Lenders breaching this risk threshold have the most stringent restrictions placed under PCA.

 “The objective of the PCA Framework is to enable supervisory intervention at appropriate time and require the Supervised Entity to initiate and implement remedial measures in a timely manner, so as to restore its financial health,” the regulator said.

The PCA framework, it said, is also intended to act as a tool for effective market discipline. The PCA framework was introduced in December 2002 as a structured early intervention mechanism along the lines of the Federal Deposit Insurance Corp.’s (FDIC) PCA framework. These regulations were later revised in April 2017.

Following Indian Overseas Bank’s exit in September, only Central Bank of India remains under PCA. RBI uses PCA framework to rein in banks that have breached certain regulatory thresholds in bad loans and capital adequacy. PCA entails curbs on high-risk lending, setting aside more money on provisions and restrictions on management salary.

The central bank’s PCA norms in 2017 had faced significant criticism, with some saying it led to a slowdown in credit flow. In fact, in October 2018, RBI’s then deputy governor Viral Acharya had to defend the revised PCA norms. Acharya had called PCA the required medicine to prevent further haemorrhaging of bank balance sheets. He had added that in spite of their worse capitalization and stressed assets ratio compared to other banks, PCA banks had credit growth that was as strong as that of other banks up until 2014.

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