What is PCA framework?
Recently, the Reserve Bank of India (RBI) announced a revised Quick Corrective Action (PCA) framework.
It is learned that the PCA framework enables RBI's supervisory intervention on banks and ensures effective market discipline.
 |
| (What is PCA framework?) |
Learn about the improved PCA Framework - Improved PCA framework
Improved structure
Ability to apply:
This framework applies to all banks operating in India, including foreign banks operating through branches or subsidiaries.
However, Payment Banks and Small Finance Banks (SFBs) have been removed from the list of lenders where immediate corrective action can be initiated by the Reserve Bank.
The new provisions will come into effect from January, 2022.
Monitoring area:
Capital, asset quality and capital-to-risk weighted asset ratio (CRAR), NPA ratio, tier 1 leverage ratio will be the main areas for monitoring in this revised structure.
However, returns on assets are not included in this revised structure as a parameter.
PCA implementation:
PCA can be applied as a result of any risk limit violation cube. Stressed banks will not be allowed to expand their loan / investment portfolio.
However, they are allowed to invest in government securities / other high quality liquid investments.
In case of bank default in fulfilling obligations to its depositors, potential settlement processes can be used without PCA metrics.
Powers of the Reserve Bank
In governance related activities, the Reserve Bank of India may replace the Board under Section 36ACA of the Banking Regulation Act, 1949.
Amendments to Section 45 of the Banking Regulation Act enable the Reserve Bank to reconstitute or merge a bank with or without the approval of the Central Government.
The Reserve Bank may, as part of its mandatory and discretionary proceedings, impose appropriate restrictions on capital expenditure in addition to technical upgrades within the limits approved by the Board under the revised PCA.
To remove PCA counter bindings:
According to four consecutive quarterly financial statements, the imposition of sanctions will be considered only if the risk limit has not been violated in any of the parameters.
Quick corrective action
Background:
PCA is a framework under which banks with weak financial metrics are monitored by the Reserve Bank.
The Reserve Bank introduced the PCA framework in 2002 as a structured initial intervention method for banks that were facing challenges due to poor asset quality or weakening due to loss of profitability.
The structure was revised in 2017 based on the recommendations of the Working Group on Financial Stability and Development.
Objectives:
The purpose of the PCA framework is to enable supervisor intervention in a timely manner and to make it mandatory for the supervised unit to implement remedial measures in a timely manner so that their financial health can be restored.
It aims to address the problem of non-performing assets (NPAs) in the Indian banking sector.
Its purpose is to warn regulators as well as investors and depositors.
Its main goal is to deal with it before time takes a serious turn.
Audited Annual Financial Results: The bank will be placed under the framework of PCA on the basis of annual financial results and supervisory evaluation usually audited by the Reserve Bank of India.
Back to basics: Non-Performing Assets (NPA)
When a borrower fails to pay interest or principal for 90 days, the loan is considered a non-performing asset.
Banks often classify 'non-performing assets' as 'sub-standard', 'suspicious' and 'loss assets'.
Capital Equity Ratio (CAR)
CAR is a measure of a bank's available capital, expressed as a percentage of the bank's risk-weighted credit exposure.
The capital adequacy ratio, also known as the 'capital-to-risk-weighted asset ratio' (CRAR), is used to protect depositors and promote the stability and efficiency of financial systems worldwide.
Tier-1 leverage ratio
It expresses the relationship between the principal capital of a banking institution and its total assets.
The Tier-1 leverage ratio is calculated by dividing Tier-1 capital by the average total accumulated assets of the bank and the different exposures from the balance sheet.
The leverage ratio is one of the many financial measures that assess a company's ability to meet its financial obligations. Here are some examples:
Equity Ratio: This ratio represents the total contribution of the owner to the company.
Loan Ratio: This ratio represents the total leverage used in the company.
Debt to equity ratio: This ratio represents the total debt used in the business compared to equity.
Question about PCA framework
1) Consider the following statements about the revised PCA framework.
1. Loan Ratio: This ratio represents the total leverage used in the company.
2. CAR is a measure of a bank's available capital, expressed as a percentage of the bank's risk-weighted credit exposure.
3. PCA can be applied as a result of any risk limit violation. Stressed banks will not be allowed to expand their loan / investment portfolio.
4. When the borrower fails to pay interest or principal amount for 90 days, the loan given to him is considered as a non-performing asset.
Which of the above statements is correct?
(A) 1,2,3 (B) 2,3,4
(C) 1,2,4 (D) 1,2,3 and 4
Welcome to IQ Curator’s General Knowledge - All Competitive Exams Questions - Answers Section. This section is a various topics & category-wise archive of IQ Curator’s GK (General Knowledge) Questions – 2021-2022 in Short MCQs format on various subjects and states. This section is suitable for aspirants preparing for UPSC-IAS, SSC-CGL and State Level Examinations of various states and also UPSC conducted NDA/ CDS/ IFS/ IES / CSE, SSC, Banking / IBPS, IAS, NTSE, CLAT, Railways, NDA, CDS, Judiciary, UPPSC, RPSC, GPSC, MPSC, MPPSC ,etc. examinations.
Please Click Here for : IQ Curator - Who will head the committee formed by RBI that would examine the role of asset reconstruction?
You may also Click Here for : General Knowledge - All Competitive Exams
Good Luck!
