The full form of PCA stands for Prompt Corrective Action. It is a framework under which banks are put under watch by the Reserve Bank of India (RBI) which have weak financial metrics. To help banks that are undercapitalized due to subpar asset quality or susceptible due to declining profitability, the RBI developed the PCA framework in 2002. PCA’s main objective is to keep the sanity check on Non-Performing Assets (NPAs) in the Indian Banking Sector.
More About PCA
- The framework was reviewed in 2017 in light of the suggestions made by the Financial Sector Legislative Reforms Commission and the working group of the Financial Stability and Development Council on Resolution Regimes for Financial Institutions in India
- PCA is designed to help warn the regulator, investors, and depositors, if a bank is about to have difficulty
- The goal is to solve issues before they become emergencies
- The new provisions were made applicable from January 2022
- The previos framework was only applicable to commercial banks. However, the revised framework is applicable to all the banks operating in India. These also include foreign banks.
- The redesigned methodology will focus on monitoring capital, asset quality, the capital-to-risk weighted assets ratio (CRAR), the NPA ratio, and the Tier I leverage ratio
- Return on assets is not a criteria that may cause action under the amended framework, nevertheles
Invocation of PCA
The PCA may be triggered by the violation of any risk threshold. Banks under stress could not be allowed to increase their credit or investment portfolios.work.
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