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Prompt Corrective Action (PCA) Framework – RBI | Know all About it

Prompt Corrective Action

With the recent news of “The Reserve Bank of India initiated Prompt Corrective Action for the troubled Lakshmi Vilas Bank”, it is important that we know and learn about RBI’s PCS Framework in detail. It will helpful for RBI Grade B Exam

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Prompt Corrective Action Framework (PCA)

Let us look at the situation of Lakshmi Vilas Bank in detail first. 

1. The Reserve Bank has initiated Prompt Corrective Action (PCA) against Lakshmi Vilas Bank (LVB) on account of high net NPAs, insufficient Capital to Risk (Weighted) Assets Ratio (CRAR) and Common Equity Tier 1 (CET 1), negative return on assets for two consecutive years and high leverage.

2. For FY19, the bank’s net NPA stood at 7.49 per cent, capital adequacy ratio was at 7.72 per cent and its return on assets was (-) 2.32 per cent. It had reported a net loss of Rs 894.10 crore for 2018-19.

3. PCA is aimed at improving the performance of the bank and will not have any adverse impact on the day-to-day operations, including acceptance/repayment of deposits in the normal course.

4. Under PCA, banks are mandated to cut lending to corporates and focus on reducing the concentration of loans to certain sectors. They are also restricted from opening new branches and paying dividends.

5. Banks currently under PCA are United Bank of India, Indian Overseas Bank, Central Bank of India, IDBI Bank and UCO Bank.

Sample Questions:

Q. What is the full form of CRAR?

  1. Credit to Return -Weighted Assets Ratio
  2. Capital to Risk-Weighted Assets Ratio
  3. Credit to Risk-Weighted Assets Ratio
  4. Capital to Return-Weighted Assets Ratio

Answer: (2)

Q. When does the RBI initiates PCA framework against the Banks?

  1. When ROA is less than 0.25%
  2. When ROA is less than 0.35%
  3. When ROA is less than 0.50%
  4. When ROA is less than 1.25%

Answer: (1)

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