The Reserve Bank of India (RBI) in the latest review has come up with a revised existing PCA framework for Scheduled Commercial Banks (SCBs). However, these changes will be effective from January 1, 2022.
As per RBI, the objective behind PCA framework is to enable supervisory intervention at the appropriate times; and require the supervised entity to initiate and implement remedial measures in a timely manner, so as to restore its financial health.
As the PCA framework would apply to all banks operating in India. It will also include foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.
Capital, asset quality and leverage of the banks are some of the key areas that will be considered for monitoring.
These indicators would be CRAR/ common equity tier I ratio 2, net NPA ratio 3 and tier I leverage ratio 4 respectively.
Based on the audited annual financial results by RBI, a bank will generally be placed under the PCA framework.
Also, RBI may impose PCA on any bank during the course of a year in case the circumstances so warrant.
So, when a bank comes under the PCA framework, one or more corrective actions may be prescribed based on the risk threshold.
The RBI has defined three risk thresholds for banks based on different parameters. Under risk threshold 1, the RBI will impose mandatory restrictions on the dividend distribution of profits.
When it comes risk threshold 2, the RBI may also slap restrictions on branch expansion, domestic or overseas, in addition to mandatory actions of threshold 1.
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