Prompt Corrective Action (PCA)

Prompt Corrective Action (PCA) is a framework in which banks with weak financial records are placed under the supervision of the Reserve Bank of India.

The first time PCA was used by the RBI was in 2016 when the number of Non-Performing Assets (NPAS) belonging to state-run banks rose beyond acceptable levels.

This article will give details about the PCA within the context of the Civil Services Examination.

How does a Prompt Corrective Action work?

The PCA framework allows a regulator to place specific restrictions like stopping payment of dividends or setting up new bank ranches. It also gives powers to place a cap on a bank’s lending limit to one sector.

Other corrective actions are as follows:

1. Special audits
2. Restructuring operations
3. Activation of a recovery plan
4. Superseding the banks board of directors
5. Brining in new management

A Prompt Corrective Action framework is evoked when certain limitations placed on banks are exceeded; these limitations are based on levels of asset quality profitability, and capital. Another restriction is when the number of negative returns on assets run into four consecutive years.

To know more about other types of banks in India, visit the linked article.

Prompt Corrective Action- Download PDF Here

What are the types of restrictions placed under a PCA?

Under the Prompt Corrective Action Framework there are two types of restrictions

1. Mandatory: The restrictions on dividend branch, extensions and directors compensations falls under this category
2. Discretionary: Restrictions on lending and deposit are under this category.

An example of mandatory restrictions being imposed were on two banks in the past – IDBI Bank and UCO Bank.

For more UPSC notes about the Indian Economy, visit the linked article.

What is the impact of PCA?

Prompt Corrective Actions have the following impact:

• The PCA is an unprecedented, if not exceptional action that impacts the customer relationship with the bank. This is not good in the long run as it will impact the credit history of the bank and will raise questions about its management.
• It can accelerate loss of market loss and further decline the position of public sector banks, allowing foreign or private banks to fill in the gap.

The Government of India feels that the PCA measures are an economic hindrance and thus feel certain norms should be relaxed. In addition it is also perceived that the dispute between the government and the RBI may impact India’s images as an investment destination.

For more information about upcoming Government Exams, visit the linked article. More exam-related preparation materials will be found through the links given below

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