Prompt Corrective Action PCA framework of the Reserve Bank of India intends to ensure that banks do ...........

Economic Affairs Others

Prompt Corrective Action (PCA) framework of the Reserve Bank of India intends to ensure that banks do not collapse. Banks placed under PCA have to face which of the following?

Restriction on the amount of loans banks can extend
Restrictions on branch expansion plans - domestic or overseas
Monitoring of bank’s non-performing assets and return on assets
Restrictions on entering into new lines of business
Restrictions on capital expenditure, other than for technological upgradation within Board approved limits

Select the correct answer using the codes below.

1, 2 and 3 only

2, 3 and 4 only

1, 4 and 5 only

All of the above

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Explanation:

PCA is process or mechanism to ensure that banks don’t go bust. Under it, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled. It was first introduced after global economy incurred huge losses due to failure of financial institutions during 1980s-90s. According to latest PCA framework, banks to be placed under it are assessed on three parameters viz. Capital ratios, Asset Quality and Profitability. Indicators to be tracked for these three parameters are CRAR (Capital to Risk weighted Assets Ratio)/Common Equity Tier I ratio, Net NPA (non-performing assets) ratio and Return on Assets (RoA) respectively. If banks breach of any risk threshold mentioned above, it results in invocation of PCA against them. RBI enforces these guidelines to ensure banks do not go bust and follow prompt measures to put their house in order. It had tightened its PCA framework in April 2017 to turn around lenders with weak operational and financial metrics. The Reserve Bank of India (RBI) has placed 11 public sector banks (PSBs) out of 21 State-owned banks under its Prompt Corrective Action (PCA) framework because of deteriorating performance. Since PCA framework restricts amount of loans banks can extend, placing 11 PSBs under it will put pressure on credit being made available to companies especially MSMEs.