The focus of RBI’s PCA framework has shifted to capital, asset quality: Care Ratings



Mumbai: The focus of the Reserve Bank of India (RBI) Rapid Corrective Action Framework (PCA) has shifted to capital, asset quality and leverage, Care Ratings said in a memo .

“In addition, recently, banks that exited the PCA framework based on the RBI assessment were not profitable when restrictions were lifted or had a higher level of non-performing assets (NPA) than authorized. The RBI addressed this issue in the revised framework by introducing a structured exit policy and removing the cost benefit parameter, ”he said.

However, the exit of any bank from the PCA framework continues to depend on the comfort of the RBI’s oversight and the assessment of the sustainability of the bank’s profitability, according to the memo.

The new framework for quick remedies would apply to all banks operating in India, including foreign banks operating through branches or subsidiaries from January 2022.

On November 2, RBI changed its Rapid Corrective Action Framework (PCA) to exclude the profitability metric from its list of triggers. The RBI also revised the level of insufficiency in the total capital adequacy ratio that would push the lender to the “risk threshold three” category.

“The objective of the PCA framework is to enable timely prudential intervention and to require the supervised entity to initiate and implement corrective measures in a timely manner, in order to restore its financial health”, the regulator said.

The PCA framework was introduced in December 2002 as a structured early intervention mechanism modeled on the PCA framework of the Federal Deposit Insurance Corp. (FDIC). These regulations were then revised in April 2017.

After the exit of the Indian Overseas Bank in September, only the Central Bank of India remains under PCA. RBI uses the PCA framework to curb banks that have exceeded certain regulatory thresholds for bad debt and capital adequacy. The PCA involves restrictions on high-risk loans, setting aside more money on provisions and restrictions on executive salaries.

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