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PCA framework

Topics Covered:

  1. Govt Policies and their performances.
  2. Indian economy and issues related to planning.

 

PCA framework

 

What to study?

  • For Prelims: About PCA- meaning, exemptions and norms.
  • For Mains: Recapitalisation- concerns associated, need and the need for comprehensive solution.

 

Context: Three more banks — Allahabad Bank and Corporation Bank, from the public sector, and Dhanlaxmi Bank from the private sector — are now out of the Reserve Bank of India’s (RBI) prompt and corrective action (PCA) framework. Earlier, such restrictions were taken off Bank of India, Oriental Bank of Commerce and Bank of Maharashtra.

There are another six banks that are still under PCA framework.

 

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.

 

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:

  1. 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.
  2. 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.