PCA Framework for UCBs

Why in News?

Recently, the Reserve Bank of India releases Prompt Corrective Action (PCA) framework for Primary (Urban) Co-operative Banks (UCBs).

What is Prompt Corrective Action (PCA) Framework?

• Introduction – RBI initiated the Scheme of Prompt Corrective Action (PCA) in 2002.
• PCA – A system that the RBI imposes on banks showing signs of financial stress.
• The regulator considers banks as unsafe if they fail to meet the standards on certain financial metrics or parameters.
• Applicability – It is applicable to both banks and NBFCs.
• It will apply to
  • All deposit-taking NBFCs, excluding government companies,
  • All non-deposit taking NBFCs in the middle, upper and top layers.
• Significance – It will stop bad lenders from going worse rather than brushing the issue aside.
• Safer NBFCs will translate to a safer overall financial system.

What are the features of the PCA framework on UCBs?

Urban Cooperative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas.

• PCA framework for UCBs – It will replace the existing Supervisory Action Framework (SAF) and come into effect from April 1, 2025.
• It is largely principle-based with fewer number of parameters as compared to the SAF, without any dilution in the supervisory rigour.
• Aim – To provide flexibility to design entity specific supervisory action plans based on the assessment of risks on a case-by-case basis. 
• Criteria’s - The norms to invoke framework for weak UCB are
  • Capital adequacy ratio (CAR) up to 250 bps below the required CAR
  • Net NPAs above 6.0% but below 9.0%
  • Incurring losses during two consecutive years.

• The breach of any risk threshold may result in invocation of PCA.
• Coverage - It will be applicable to UCBs with deposits above 100 crores.

• Exemption - Tier 1 UCBs have been excluded from the PCA framework for the present.
• However, they shall continue to be subjected to enhanced monitoring under the existing supervisory framework.
• Invocation - A bank will generally be placed under PCA Framework based on the Reported and Audited Annual Financial Results and the ongoing Supervisory Assessment.
• However, RBI may impose PCA on any bank during a year in case the circumstances warrant.
• Withdrawal of PCA – It will be considered if no breaches in risk thresholds in any parameters are observed as per four successive quarterly financial statements. 
• Other features - The fixed limit of Rs 25,000 for capital expenditure restrictions on UCBs under SAF has been removed.
• The revised framework enables the Supervisors to decide the limit depending upon their assessment of each entity.

What are the significance of RBI’s PCA?

• Early intervention- PCA acts as an early warning system, allowing the RBI to identify and address potential issues in a bank before they become severe.
• Financial stability- It helps maintain the overall health of the banking sector, ensuring financial stability and protecting depositors' interests.
• Risk management- Banks under PCA are required to improve their risk management practices, reduce non-performing assets (NPAs), and enhance their capital adequacy.
• Regulatory oversight- PCA imposes restrictions and mandates corrective actions on banks, such as limiting dividend distribution, branch expansion, and high-risk lending, to prevent further deterioration.
• Restoring confidence- By monitoring and enforcing corrective measures, PCA helps restore confidence in the banking system among investors, depositors, and the public.

References

1. The Hindu | PCA for urban co-operative banks
2. Business Standard | PCA framework for urban cooperative banks