Prompt Corrective Action (PCA) is action taken by the RBI to maintain or improve the financial health of weak banks by applying certain restrictions on them as per their risk threshold. It is a qualitative tool of the monetary policy under direct action framework. It was first introduced by RBI Governor Mr Bimal Jalan in 2002 and it gives power to RBI under the Banking Regulation Act, 1949.
Based on some parameter RBI applies PCA framework on banks, these parameters include capital, asset quality, profitability etc. There are three risk thresholds as per variation in these parameters, explained below:
Risk Threshold 1
- When Capital to Risk Weight Asset (CRAR) ratio of banks is more than 7.75 % but less than the required amount of 10.25%.
- NNPA ( Net Non-Performing Advances are more than or equal to 6% but less than 9%
- Return on Assets (ROA) is negative for two consecutive years.
All these parameters put the banks under Risk Threshold 1 of the PCA framework.
Risk Threshold 2
- When CRAR is more than equal to 6.25 per cent and less than 7.75 per cent.
- When NNPA is more than equal to 9 per cent but less than 12 per cent.
- When Return on Assets is negative for three consecutive years.
All these parameters put the banks under Risk Threshold 2 of the PCA framework.
Risk Threshold 3
- When the CRAR of banks is less than 6.25 per cent.
- NNPA is greater than or equal to 12 per cent.
- Return on Assets is negative for four consecutive years.
All these parameters put the banks under Risk Threshold 3 of the PCA framework and this is the worst case.
When a bank comes under the PCA framework, then some restrictions are applied on them which are shown in the figure;
To whom PCA applies?
To say it in a simple way, it applies on all the scheduled commercial banks except Regional Rural Banks. Mean it applies to private, public and foreign sector banks, payment banks, small finance banks, local area banks. In the latest development, NABARD is planning to apply Prompt Corrective Active on RRBs which are not in good financial health while the cooperatives banks, AIFIs ( All India Financial Institutions ), NBFCs ( Non-Banking Financial Companies ) are still not under the PCA framework of Reserve Bank of India.
Out of 21 Public sector banks, currently, 11 are under the prompt corrective action. Some terms mentioned above areas:
- NNPA Ratio: It is the ratio of net NPA to Net Advances.
- Return on Assets: It is the percentage of profit after taxes to average total assets.