The Reserve Bank of India (RBI) has granted permission to three public sector banks to discontinue the Prompt Corrective Action (PCA) directive. This decision was taken following a government-initiated capital infusion and a decrease in the net non-performing asset ratio. The noted banks are Bank of India, Bank of Maharashtra, and Oriental Bank of Commerce (OBC). However, eight other public sector banks continue to function under the restrictions imposed by PCA.
Understanding the PCA Framework
Prompt Corrective Action (PCA) is a mechanism introduced by the RBI in 2002, under which close monitoring is conducted over banks displaying weak financial measures. It provides a structured early-intervention procedure for banks facing potential financial risks due to poor asset quality and loss of profitability. The primary essence of the PCA is to alert both the regulators and the investors or depositors about any impending issues the bank may encounter.
Banks Exiting the PCA Framework
The triple banks – Bank of India, Bank of Maharashtra, and Oriental Bank of Commerce – have been allowed to exit the PCA framework. This decision was made after reviewing the capital infusions by the government and the decline in the banks’ net non-performing asset ratios. The RBI initiated this review of PCA post the government’s request to uplift the restrictions on Public Sector Banks (PSBs), aiming for an enhancement in credit growth throughout the country.
Understanding the Triggers to PCA
The PCA framework is initiated if a bank crosses one of the three risk thresholds. These include the capital to risk-weighted assets ratio, net non-performing assets (NPA), and return on assets (RoA).
Facts About the PCA Framework
| Fact | Description |
|---|---|
| Introduction Year | 2002 |
| Initiating Authority | RBI |
| Purpose | To monitor banks with weak financial metrics |
| Triggers | Capital to risk-weighted assets ratio, Net non-performing assets, Return on assets |
| Banks Exited Recently | Bank of India, Bank of Maharashtra, Oriental Bank of Commerce |
Remaining Banks Under PCA
Although three public sector banks have successfully exited the PCA framework, eight other public sector banks are still functioning under the PCA directives. These restrictions are aimed at maintaining oversight while the banks improve their financial metrics to meet regulatory standards.