The government expects the public sector banks to come out of the Prompt Corrective Action (PCA) framework by the end of this year and will provide them adequate capital when required, Department of Financial Services Secretary Rajiv Kumar said
As many as 11 out of 21 state-owned banks are currently under the RBI’s Prompt Corrective Action (PCA) framework, which kicks in when banks breach any of the three key regulatory trigger points i.e. capital to risk-weighted assets ratio, net non-performing assets (NPA) and Return on Assets (RoA). Depending on the risk thresholds set in PCA rules, the banks are restricted from paying the dividend, expanding the number of branches, staff recruitment and increasing the size of their loan book. Two lenders, Dena Bank and Allahabad Bank are facing restrictions on granting fresh loans.
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 actions that can be imposed on banks include special audit, restructuring operations and activation of the recovery plan. Banks’ promoters can be asked to bring in new management, too. The RBI can also supersede the bank’s board, under PCA.
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 a maximum tolerance limit, sets net NPA at over 12% and negative return on assets for four consecutive years.
There is two type of restrictions, mandatory and discretionary. Restrictions on the dividend, branch expansion, directors compensation, are mandatory while discretionary restrictions could include curbs on lending and deposit. In the cases of two banks where PCA was invoked after the revised guidelines were issued — IDBI Bank and UCO Bank — only mandatory restrictions were imposed. Both the banks breached risk threshold 2.
Banks are not allowed to renew 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 the interbank market.