Prompt Corrective Action (PCA) Framework

 Under the powers conferred under RBI Act, 1934 and Banking Regulation Act, 1949, Reserve Bank has been taking bank-specific supervisory corrective actions where the financial position warrants such measures. These included directing banks to submit quarterly Monitorable Action Plans and progress reports on various targets set by the Reserve Bank, such as augmentation of capital, improvement in profitability, reduction of NPAs, reconciliation of entries in inter-branch, inter-bank and nostro accounts, review / renewal of borrowal accounts, etc. In extreme cases, Reserve Bank had also put caps on credit-deposit ratio, restrictions on payment of dividend, call money borrowings and raising of high cost deposits including Certificate of Deposit, ban on recruitment, opening of branches, etc. Where the financial position so warrants, Reserve Bank effects changes in the management of banks by removal of the Chief Executive Officer or Directors of the Board. In addition, RBI appoints additional Directors / Observers to oversee the functioning of the bank so as to prevent the affairs of the bank being conducted in a manner detrimental to the interest of present or future depositors. RBI also exercises powers in extreme cases to place banks under moratorium or initiate winding up proceedings.

Though there are explicit provisions (Sections 35A, 36AA, 36AB, 37, 46 to 48 of Banking Regulations Act, 1949) empowering Reserve Bank to initiate appropriate corrective actions against banks which are showing signs of distress, these are not properly structured and no time limit is set for response to such actions in the case of definite weaknesses in banks. It is, therefore, necessary that we should evolve rule-based corrective actions, which are transparent for addressing early warning signals.

A system of Prompt Corrective Action (PCA) is pre-determined rule-based structured early intervention system. It invokes action by RBI if financial fundamentals of banks hit certain thresholds.

 Breach of any risk threshold (as detailed under) may result in invocation of PCA.

PCA matrix – Parameters, indicators and risk thresholds
Parameter	Indicator	Risk Threshold 1	Risk Threshold 2	Risk Threshold 3
(1)	(2)	(3)	(4)	(5)
Capital (Breach of either CRAR or CET 1 ratio)	CRAR - Minimum regulatory prescription for Capital to Risk Assets Ratio + applicable Capital Conservation Buffer (CCB) and/or Regulatory Pre-Specified Trigger of Common Equity Tier 1 Ratio (CET 1 PST) + applicable Capital Conservation Buffer (CCB)	Upto 250 bps below the Indicator prescribed at column (2) Upto 162.50 bps below the Indicator prescribed at column (2)	More than 250 bps but not exceeding 400 bps below the Indicator prescribed at column (2) More than 162.50 bps below but not exceeding 312.50 bps below the Indicator prescribed at column (2)	In excess of 400 bps below the Indicator prescribed at column (2) In excess of 312.50 bps below the Indicator prescribed at column (2)
	Breach of either CRAR or CET 1 ratio to trigger PCA
Asset Quality	Net Non-Performing Advances (NNPA) ratio	>=6.0% but <9.0%	>=9.0% but < 12.0%	>=12.0%
Leverage	Regulatory minimum Tier 1 Leverage Ratio	Upto 50 bps below the regulatory minimum	More than 50 bps but not exceeding 100 bps below the regulatory minimum	More than 100 bps below the regulatory minimum

The PCA Framework would apply to all banks operating in India including foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.

A bank will generally be placed under PCA Framework based on the Audited Annual Financial Results and the ongoing Supervisory Assessment made by RBI. RBI may impose PCA on any bank during the course of a year (including migration from one threshold to another) in case the circumstances so warrant.

Exit from PCA and Withdrawal of Restrictions under PCA - Once a bank is placed under PCA, taking the bank out of PCA Framework and/or withdrawal of restrictions imposed under the PCA Framework will be considered: a) if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements, one of which should be Audited Annual Financial Statement (subject to assessment by RBI); and b) based on Supervisory comfort of the RBI, including an assessment on sustainability of profitability of the bank. 

PCA frameowrk is also applicable to:

1. All Deposit Taking NBFCs [Excluding Government Companies],

2. All Non-Deposit Taking NBFCs in Middle, Upper and Top Layers
   [Excluding - (i) NBFCs not accepting/not intending to accept public funds; (ii) Government Companies, (iii) Primary Dealers and (iv) Housing Finance Companies].

Reference:

"Prompt Corrective Action (PCA) Framework for Scheduled Commercial Banks"

RBI Press Release No. RBI/2021-22/118 DOS.CO.PPG.SEC.No.4/11.01.005/2021-22 ( November 02, 2021 )

"PCA Framework for NBFCs"

RBI Press Release No. 2021-2022/1352 ( December 14, 2021 )