RBI issues Revised Prompt Corrective Action (PCA) framework for NPAs

Within a week of promising to issue new guidelines to resolve bad loans problem, Reserve Bank today issued a new set of enabling provisions under the label of revised prompt corrective action (PCA) framework. The RBI said the new set of provisions is effective April 1 based on the financials of each bank as of March 2017, and override the existing PCA framework. It also said the new framework will be reviewed after three years.”A bank will be placed under PCA framework based on the audited annual financial results and RBI’s supervisory assessment. However, 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,” RBI said. More importantly, it said if a bank crosses the third level of risk threshold (wherein a bank’s common equity tier I capital falls below the threshold of 3.625 per cent by 3.125 per cent or more) the said bank will be either amalgamated or merged or taken over by another entity. “Breach of ‘risk threshold 3′ of CET1 by a bank would identify it as a likely candidate for resolution through tools like amalgamation, reconstruction, winding up etc,” RBI said. It also said in case a “bank defaults in meeting the obligations to its depositors, possible resolution processes may be resorted to without reference to the PCA matrix.” Extending the new provisions to foreign banks, RBI said the revised PCA framework is applicable to all banks including small banks and foreign banks. The new framework also places capital, asset quality and profitability as the key areas for monitoring and the over-riding indicators tracking capital, asset quality and profitability will be CRAR/common equity tier I ratio, met NPA ratio and return on assets, respectively, it added. A bank’s leverage will be monitored additionally as part of the PCA framework and any breach of any risk threshold will result in invocation of PCA. On CRAR or capital to risk assets ratio, which is the minimum regulatory prescription and the applicable capital conservation buffer (CCB), it said the current minimum prescription is 10.25 per cent (9 per cent minimum total capital plus 1.25 per cent of CCB as on March 31, 2017).

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