Prompt Corrective Action Plan of RBI

Prompt Corrective Action Plan of RBI

The Reserve Bank of India (RBI) on Tuesday placed two more lenders — Bank of India (BoI) and United Bank — on its corrective action list. The prompt...

The Reserve Bank of India (RBI) on Tuesday placed two more lenders — Bank of India (BoI) and United Bank — on its corrective action list. The prompt corrective action (PCA) initiated by the central bank follows the rise in bad loans in these lenders and envisages placing restrictions on operations. With this, the number of banks under PCA has risen to 10. All of the banks are in the public sector.

Once PCA is triggered by the regulator, the bank faces restrictions on spending money on opening branches, recruiting staff and giving increments to employees. Further, the bank can disburse loans only to those companies whose borrowing is above investment grades.

The eight banks identified earlier were Corporation Bank, Oriental Bank of Commerce, Dena Bank, Central Bank of India, IDBI Bank, Indian Overseas Bank, Bank of Maharashtra and UCO Bank. According to analysts, while the government would infuse capital into all lenders, it is unlikely that the banks under PCA will be the acquiring banks during consolidation.

The Reserve Bank has specified certain regulatory trigger points, as a part of prompt corrective action (PCA) Framework, in terms of three parameters, i.e. capital to risk weighted assets ratio (CRAR), net non-performing assets (NPA) and Return on Assets (RoA), for initiation of certain structured and discretionary actions in respect of banks hitting such trigger points.

The PCA framework is applicable only to commercial banks and not extended to co-operative banks, non-banking financial companies (NBFCs) and FMIs. The PCA framework prescribes five levels of trigger points based on capital measures, i.e. total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, for insured state-chartered non-member banks.

On bank reaching the levels of undercapitalized, or significantly undercapitalized, or critically undercapitalized, automatic restrictions, as per provisions of Section 38 of FDI Act, are placed on the concerned bank in respect of (i) payment of capital distributions and management fees, (ii) the growth of assets, (iii) requiring prior approval of certain expansion proposals, (iv) requiring that the FDIC monitor the condition of the bank, and (v) requiring submission of a capital restoration plan.

In addition to the above restrictions and close monitoring, the significantly undercapitalized and critically undercapitalized banks are restricted to pay compensation to senior executive officers of the institution.

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