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PCA framework revised: Asset quality, capital, leverage key

The new provisions will be effective from January 1, 2022, an RBI notification said. The revised framework excludes return on assets as a parameter which may trigger action under the framework.

By: ENS Economic Bureau | Mumbai |
November 3, 2021 3:58:10 am
RBI Governor Shaktikanta Das

The Reserve Bank on Tuesday announced a revised Prompt Corrective Action (PCA) framework for banks to enable supervisory intervention at an “appropriate time” and also act as a tool for effective market discipline. The new provisions will be effective from January 1, 2022, an RBI notification said. The revised framework excludes return on assets as a parameter which may trigger action under the framework.

Payments banks and small finance banks (SFBs) have also been removed from the list of lenders where prompt corrective action can be initiated. Capital, asset quality and leverage will be the key areas for monitoring in the revised framework, the RBI said.

“Indicators to be tracked for capital, asset quality and leverage would be CRAR/ common equity tier I ratio, net NPA ratio and tier I leverage ratio, respectively,” as per the revised framework. In governance related actions, the RBI can supersede the board under Section 36ACA of the BR Act, 1949.

The breach of any risk threshold may result in invocation of the PCA. The framework will 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 the RBI,” it said, adding, “The 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.”

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