Prompt Corrective Action (PCA)

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News:The Reserve Bank of India (RBI) has initiated Prompt Corrective Action (PCA) against Lakshmi Vilas Bank(LVB).

Facts:

What is Prompt corrective action(PCA):

  • PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.
  • The RBI introduced the PCA framework in 2002 as a structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.
  • It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.

When is PCA invoked?

  • 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 net non performing assets(NPA) ratio.

Types of restrictions:

  • There are two types of restrictions mandatory and discretionary restrictions.
  • The restrictions on dividends, branch expansion, directors compensation are mandatory while discretionary restrictions could include curbs on lending and deposit.
  • RBI may also place restrictions on credit by PCA banks to unrated borrowers or those with high risks but it doesn’t invoke a complete ban on their lending.
  • RBI may also impose restrictions on the bank on borrowings from interbank market.
  • Further, the banks may also not be allowed to enter into new lines of business.

Additional information:

Non Performing Asset(NPA):

  • A non performing asset (NPA) is a loan or advance for which the principal or interest payment remains overdue for a period of 90 days. 
  • The banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.