The Reserve Bank of India's Prompt Corrective Action framework provides guidelines for intervention when banks demonstrate weak financial performance based on capital, asset quality, profits, and losses. The framework specifies thresholds for capital ratios, non-performing assets, and returns on assets that trigger increasing restrictive actions by the RBI to restore financial health as a bank's condition deteriorates. As of March 2019, six public sector banks in India remained under PCA framework restrictions, down from a peak of twelve in early 2018, as government capital injections helped other banks improve their financial positions.

1. Presented by-
Anand Hanchinal

2. RBI’s Prompt Corrective Action (PCA) Framework is a set of guidelines for
banks that are weak in terms of identified indicators including – poor asset
quality, insufficient capital and insufficient profit or losses.
The PCA is an early intervention package or resolution guideline by the RBI
when a bank turns weak in terms of the identified indicators.
What is prompt corrective action (PCA)

3. When initiated prompt corrective action (PCA)
The Reserve Bank of India initiated the Scheme of Prompt
Corrective Action (PCA) in 2002 to discipline banks when they
report poor and risky financial performance.
PCA is a policy action guideline first in May 2014 and revised
effective from April 1, 2017 if a commercial bank’s financial
condition worsens below a mark.

4. Background and introduction in India.
• During 1980’s to 1990’s their was large and great financial stress for banks
and financial institution all over the globe.
• The best example and the victim of such crises was USA. More than 1600
commercial banks and financial institution which were insured by FDIC
(Federal department of insurance corporation) were near to be closed or on
financial assistance.
• It resulted into cumulative losses in US economy which amounted more than
100 billion dollar $ which indirectly infected many other countries.
• This issue led to Development and adoption of appropriate supervisory
strategy.
• Even in such situation the large or medium scale banks cannot be closed/shut
down because the reason will be:-
People will loose trust in
financial institution.
Economy will go
down.

5. What is the criteria for identifying bank as PCA category
bank
The PCA framework specifies the trigger points or the level in which the
RBI will intervene with corrective action. This trigger points are expressed
in terms of parameters for the banks.
The trigger points are: -
Capital to risk weighted assets ratio (CRAR),
Net non-performing assets (NNPA), and
Return on assets (RoA).
This means that when a particular bank is reporting the
low level of CRAR high level of NNPA or Return on Assets (profit), the RBI
will ask it to adopt certain restrictive measures.

6. CRAR (capital to risk asset ratio)
• Capital to Risk (Weighted) Assets Ratio (CRAR) is also known as Capital adequacy
Ratio, the ratio of a bank’s capital to its risk. The banking regulator tracks a bank’s
CAR to ensure that the bank can absorb a reasonable amount of loss.
• CRAR Indicates bank capital risk proportion in percentage.
• Higher CRAR indicates a bank is better capitalized.
• Purpose of CRAR :
• Protect depositors
• Promote the stability of the financial system.

7. As per norm If Bank CRAR is more then 9% its indicate good financial stabilized of
the Bank.
If CRAR is less then 9% Bank as to follow the below mentioned tier regulations
 Tier 1 (CRAR less than 9%, but equal or more than 6%) :
 Bank to submit capital restoration plan
 Restrictions on new expansion & entering into new lines of business,
 Restrictions on accessing costly deposits and making dividend payments and
recapitalization
 Restrictions on borrowing from inter-bank market,
 Reduction of stake in subsidiaries and reducing its exposure to sensitive sectors like capital
market, real estate and etc.

8.  Tier 2 (CRAR less than 6%, but equal or more than 3% :
 All the Tier I regulation norms all applicable and the below norms applicable additionally
 RBI could take steps to bring in new Management/ Board of director,
 Appoint consultants for business/ organizational restructuring,
 Take steps to change ownership, and also take steps to merge the bank if it fails to submit
recapitalization plan.
 Tier 3 (less than 3% ):
 All the Tier I & Tier II regulation norms all applicable and the below norms applicable
additionally
 RBI more closely monitor
 steps to merge/amalgamate/liquidate the bank or impose moratorium on the bank, if its
CRAR does not improve beyond 3% within one year or within such extended period as
agreed to.

9. NPA- Non Performing Asset
• The Principal or interest amount on a particular loan which is due for more than
90 days are classified as NPA’s. it may be either principal amount or interest
amount.
• Net NPAs over 10% but less than 15% - special drive to reduce NPAs and contain
generation of fresh NPAs, review loan policy and take steps to strengthen credit
appraisal skills, follow-up of advances and suit-filed/decreed debts, put in place
proper credit-risk management policies, reduce loan concentration restrictions in
entering new lines of business, making dividend payments and increasing its stake
in subsidiaries.
(ii) Net NPAs 15% and above – In addition to actions on hitting the above trigger
point, bank’s Board is called for discussion on corrective plan of action.

10. ROA- Return on asset
It is a indicator of how well a company utilizes its assets, by determining how
profitable a company is relative to its total assets. .
• ROA measures the profit of company according to the asset company has. It can
be used for looking a overview condition of the company/ bank by
1) manager 2) Investors 3) Analyst.
• To get an idea of how efficient is the management of company is in using the
assets to generate earning is measured.
• In same way bank having asset efficient to generate profit from such assets is
calculated under ROA.
• ROA is displayed as a percentage that is below 0.25 %.
• ROA takes into account a company’s debt, unlike other measurement, such as
Return on Equity (ROE).
• CALCULATION :- ROA is calculated by dividing a company’s Net income by
total assets. As a formula, it would be expressed as:
Return on Assets = Net Income/ Total asset
• Higher ROA indicates more asset efficiency.

11. Impacts When PCA is Triggered
Bank Cannot Increase their fee based income.
Banks to conduct a special drive to reduce the stock of NPA’s
and take measures to stop generation of new NPA’s.
Banks are not allowed To enter into new lines of Business.
Banks will not be allowed to Renew or Access costly deposit.
RBI will impose restrictions on banks borrowing from interbank
market.

12. Challenges and issues :-
• PCA is an exceptional action and impacts the rating of the bank as well as
consumer confidence. This is detrimental in the long run as it impacts the credit
history of the bank and raises questions about its management.
• PCA can accelerate the loss of market share and cause further decline of the
position of the public sector banks in the financial system in favor of private banks
and foreign banks.
• PCA is seen by government as hindering economic growth therefore is arguing for
easier lending policies by relaxing the PCA norms and aligning them to global
norms.
• The tussle between RBI and government can negatively impact the image of India
as an investment destination.

13. PCA Framework banks as on March 2019
As on March 9, 2019, there are only six banks which are under the PCA
Framework. All these banks are PSBs: Dena Bank, United Bank of India,
IDBI Bank, UCO Bank, Central Bank of India, Indian Overseas Bank.
As per the recent RBI notifications, six banks- Bank of Maharashtra, Bank
of India, Oriental Bank of Commerce, Dhanlaxmi Bank, Allahabad Bank
and Corporation Bank, are out of the PCA framework this year.
Earlier, there were 11 PSBs under the PCA Framework. Government has
infused capital into several of these PSBs and they were redeemed from
the PCA list.
In early 2018, there were 12 banks under PCA framework, implying that their
financial conditions were weak. Out of these, 11 were PSBs. Later, the
government injected capital into the PSBs besides making several steps to
improve their performance. As a result, as on March 9, 2019, there were only six
banks (all PSBs) under the PCA framework.