Print Friendly, PDF & Email

Prompt corrective action (PCA) framework

Topics covered:

  1. Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
  2. Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 

Prompt corrective action (PCA) framework

What to study?

  • Static Part: What is PCA framework? Key facts.
  • Dynamic and Current: Why have a PCA framework, concerns and issues associated.

 

Context: The 11 state-run banks, which are under the RBI’s prompt corrective action (PCA) framework, have seen a 400 basis points increase in their share of retail loans at 19% in the four years ending September 2018.

 

Background:

The RBI began to place state-run banks under the PCA framework for the first time in September 2016, when their NPAs soared beyond the regulatory tolerance levels.

 

Negative effects:

Banks under the PCA have lost market share to private sector banks in corporate loans and unsecured personal loans, and it will be a Herculean task for the affected banks to claw this back. The PCA framework puts restrictions on weaker banks on many aspects, including fresh lending and expansion, and salary hikes, among others.

The 11 banks under the PCA are: Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra. These banks together control over 20 per cent of the credit market.

 

What is PCA?

PCA norms allow the regulator to place certain restrictions such as halting branch expansion and stopping dividend payment. It can even cap a bank’s lending limit to one entity or sector. Other corrective action that can be imposed on banks include special audit, restructuring operations and activation of recovery plan. Banks’ promoters can be asked to bring in new management, too. The RBI can also supersede the bank’s board, under PCA.

 

When is PCA invoked?

The PCA is invoked when certain risk thresholds are breached. There are three risk thresholds which are based on certain levels of asset quality, profitability, capital and the like. The third such threshold, which is maximum tolerance limit, sets net NPA at over 12% and negative return on assets for four consecutive years.

 

What are the types of restrictions?

There are two type of restrictions, mandatory and discretionary. Restrictions on dividend, branch expansion, directors compensation, are mandatory while discretionary restrictions could include curbs on lending and deposit. In the cases of two banks where PCA was invoked after the revised guidelines were issued — IDBI Bank and UCO Bank — only mandatory restrictions were imposed. Both the banks breached risk threshold 2.

 

What will a bank do if PCA is triggered?

Banks are not allowed to re new or access costly deposits or take steps to increase their fee-based income. Banks will also have to launch a special drive to reduce the stock of NPAs and contain generation of fresh NPAs. They will also not be allowed to enter into new lines of business. RBI will also impose restrictions on the bank on borrowings from interbank market.

 

Impact:

Small and medium enterprises will have to bear the brunt due to this move by RBI. Since the PCA framework restricts the amount of loans banks can extend, this will definitely put pressure on credit being made available to companies especially the MSMEs.

Large companies have access to the corporate bond market so they may not be impacted immediately. It has been predicted that if more state-owned banks are brought under PCA, it will impact the credit availability for the MSME segment.

Sources: the hindu.