India has been ranked 5th on a list of countries with highest Non-performing Assets (NPA) levels and is on top spot among the BRICS nations, according to latest report by CARE Ratings.

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What is PCA?

PCA (Prompt Corrective Action) framework is supervisory tool of RBI, which involves monitoring of certain performance indicators of banks to check their financial health early warning exercise to ensure that banks do not go bust. Its objective is to facilitate banks to take corrective measures including those prescribed by RBI, in timely manner to restore their financial health.

PCA framework is invoked on banks when they breach any of three key regulatory trigger points (or thresholds). They are capital to risk weighted asset ratio, net non-performing assets (NPA) and Return on Assets (RoA).

Depending on risk thresholds set in PCA framework, banks are put under two type of restrictions, mandatory and discretionary depending upon their placement in PCA framework levels. The mandatory restrictions are on dividend, branch expansion, directors’ compensation while discretionary restrictions include curbs on lending and deposit.

Requirement for PCA framework in India:

• To prevent further piling of NPAs which were around 11.8% as of March, 2018.

• To prevent bank failure and restore profitability and sustainability.

• To restrict expansion of reckless credit growth, which resulted into mounting of NPAs.
• PCA is required to fulfil commitment under BASEL III norms.
• To fight against the practice of ever-greening of loans.
• To improve governance of banks, thus preventing scams such as that of PNB(Punjab National Bank).

Possible fallouts of PCA invocation:

• Banks under the PCA may lose market share to private sector banks in corporate loans and unsecured personal loans.
• 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.
• Restriction on branch expansion may negatively impact financial inclusion.

Conclusion

The 11 Public Sector Banks put under PCA framework by the Reserve Bank of India have shown improvement in their Non-performing Assets. Thus, PCA framework is an essential step to maintain the health of banking sector which is very much essential for the robust growth of economy.