Prompt corrective action

Why in News?

Reserve Bank has initiated prompt corrective action against public sector lender Dena Bank.The RBI has initiated similar action against other public sector banks, including IDBI Bank, Indian Overseas Bank and UCO Bank before this.

 

FACTS FOR PRELIMS

What is PCA?

RBI has issued a policy action guideline in the form of Prompt Corrective Action (PCA) Framework if a commercial bank’s financial condition worsens below a mark.

The PCA framework specifies the trigger points or the level in which the RBI will intervene with corrective action. These trigger points are expressed in terms of parameters for the banks.

The parameters that invite corrective action from the central bank are:

i)Capital to Risk-weighted Asset Ratio (CRAR)

ii)Net Non-Performing Assets (NPA) and

iii)Return on Assets (RoA)

iv)Leverage ratio

 

When these parameters reach the set trigger points for a bank the RBI will initiate certain structured and discretionary actions for the bank.

 

Some of the structured and discretionary actions that could be taken by the Reserve Bank are:

i)Recapitalization,

ii)Restrictions on borrowing from inter-bank market to steps to merge/amalgamate/liquidate the bank ;

iii)Impose a moratorium on the bank if its CRAR does not improve beyond etc.

 

NOTE4STUDENTS-The PCA framework is applicable only to commercial banks and not extended to co-operative banks, non-banking financial companies (NBFCs) and FMIs.

 

Source-The Hindu.