Prompt Corrective Action (PCA)

The Reserve Bank of India (RBI) introduced the Prompt Corrective Action (PCA) framework in 2016 to address the rising Non-Performing Assets (NPAs) in state-owned banks. This article aims to provide a comprehensive understanding of the PCA, particularly relevant for Civil Services Examination aspirants.

Functioning of Prompt Corrective Action

The PCA framework empowers the RBI to impose specific restrictions on banks with shaky financial records. These restrictions include:

• Halting the payment of dividends
• Prohibiting the establishment of new bank branches
• Capping a bank’s lending limit to a particular sector

Additional corrective actions under the PCA include:

1. Conducting special audits
2. Restructuring operations
3. Implementing a recovery plan
4. Overriding the bank’s board of directors
5. Appointing new management

The PCA framework is invoked when banks exceed certain thresholds based on asset quality, profitability, and capital. Another trigger is four consecutive years of negative returns on assets.

Restrictions Imposed Under PCA

The PCA framework imposes two categories of restrictions:

1. Mandatory: These restrictions include:

   • Restrictions on dividend payments
   • Restrictions on branch expansions
   • Restrictions on directors’ compensations

2. Discretionary: These restrictions include:

   • Restrictions on lending
   • Restrictions on deposits

By understanding the PCA framework, Civil Services Examination aspirants can gain insights into the regulatory measures taken by the RBI to ensure the stability and soundness of the banking sector in India.

Prompt Corrective Action (PCA) and its Impact on Indian Banks

The Reserve Bank of India (RBI) has imposed Prompt Corrective Actions (PCA) on certain banks in recent years, including IDBI Bank and UCO Bank. These actions are aimed at addressing financial weaknesses and improving the overall health of the banking sector.

The Impact of PCA

PCA can have several negative consequences for banks, including:

• Customer-bank relationship: PCA can strain the relationship between banks and their customers, as the restrictions imposed may limit the bank’s ability to provide certain services or extend credit. This can damage the bank’s reputation and raise questions about its management.

• Loss of market share: PCA can lead to a loss of market share for affected banks, as customers may move their business to other banks that are not subject to such restrictions. This can further weaken the position of public sector banks and create opportunities for foreign or private banks to fill the gap.

Government’s Perspective

The Government of India views PCA measures as an economic obstacle and believes that certain norms should be relaxed. There are also concerns that disagreements between the government and the RBI could affect India’s reputation as an investment destination.

Frequently Asked Questions

Why is Prompt Corrective Action required?

PCA serves as an early warning system to alert the regulator, investors, and depositors about potential financial distress in a bank.

How many banks are under PCA in India?

As of now, there are 11 banks in India under the Prompt Corrective Action framework:

• 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
• Bank of Maharashtra

Is Prompt Corrective Action applicable to Private Banks?

According to the Reserve Bank of India (RBI), private banks cannot remain under the PCA framework indefinitely. If the bank’s promoters are unable to revive the bank’s financial health over a prolonged period, the RBI may consider auctioning the bank’s assets, liabilities, and operations.