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Economy
Mahesh

22/09/22 05:15 AM IST

Central Bank exits RBI’s PCA framework

In News 
  • State-owned Central Bank of India will no longer be subject to strict lending curbs imposed by the Reserve Bank of India (RBI) in June 2017, as the regulator said that the bank has been taken out of the prompt corrective action (PCA) restrictions.
About PCA Framework 
  • The PCA framework was introduced in December 2002 as a structured early intervention mechanism along the lines of the Federal Deposit Insurance Corp.’s (FDIC) PCA framework.
  • These regulations were later revised in April 2017. 
  • The framework applies to all banks operating in India, including foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.
  • However, payments banks and small finance banks (SFBs) have been removed from the list of lenders where prompt corrective action can be initiated.
  • Capital, Asset Quality and Capital-To-Risk Weighted Assets Ratio(CRAR), NPA ratio, Tier I Leverage Ratio, will be the key areas for monitoring in the revised framework.
Invocation of PCA
  • The breach of any risk threshold may result in the invocation of the PCA. Stressed banks may not be allowed to expand credit/investment portfolios.
  • However, they are allowed to invest in government securities/other high-quality liquid investments.
  • In the case of a default on the part of a bank in meeting the obligations to its depositors, possible resolution processes may be resorted to without reference to the PCA matrix.
Objective 
  • The objective of the PCA framework is to enable supervisory intervention at an appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner, so as to restore its financial health.
  • It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.
  • It is intended to help alert the regulator as well as investors and depositors if a bank is heading for trouble.
  • The idea is to head off problems before they attain crisis proportions.
RBI’s Powers
  • In governance-related actions, the RBI can supersede the board under Section 36ACA of the Banking Regulation Act, 1949.
  • Amendment to Section 45 of the BR Act enables the Reserve Bank to reconstruct or amalgamate a bank, with or without implementing a moratorium, with the approval of the Central government.
  • The RBI, as part of its mandatory and discretionary actions, may also impose appropriate restrictions on capital expenditure, other than for technological upgradation within Board approved limits, under the revised PCA.
Source- Live Mint 

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