The Reserve Bank of India (RBI) on Thursday proposed stricter prompt corrective action (PCA) guidelines for banks and laid out a three-tier structure that lenders will have to comply with. The central bank said if a bank reaches the ‘risk threshold 3’ category, it will be a likely candidate for recovery measures such as amalgamation, reconstruction and winding up. Beginning April 1, riskiness of a lender will be categorised as risk threshold 1, 2 and 3. These categorisation will depend on factors such as capital adequacy levels, common equity tier 1 (CET 1) ratio, net non-performing assets (NNPA), return on assets (RoA) and tier 1 leverage ratio.
The PCA framework, the RBI said, would apply to all banks operating in India including small lenders and foreign banks operating through branches or subsidiaries based on breach of risk thresholds. “A bank will be placed under PCA framework based on the audited annual financial results and the supervisory assessment made by RBI. However, RBI may impose PCA on any bank during the course of a year (including migration from one threshold to another) in case the circumstances so warrant,” it said.
For instance, if a bank’s capital adequacy is less than 10.25% but greater than or equal to 7.75%, it will be classified as risk threshold 1; if CRAR is less than 7.75% but greater than or equal to 6.25%, it will be classified as risk threshold 2 and if it is below 3.625%, the bank will be risk threshold 3. At present, minimum capital requirement stands at 10.25% (9% minimum total capital plus 1.25% of CCB as on March 31, 2017).
Similarly, if NNPAs are less than 9%, but greater than or equal to 6%, the bank will be threshold 1; less than 12% but greater than or equal to 9% will fall under threshold 2 and 12% and above will be classified as threshold 3.
The RBI said promoters of banks under threshold 1 will have to bring in more capital and it would also place restriction on dividend distribution. It will recommend to owners (government/ promoters/ parent of foreign bank branch) to bring in new management/ board and remove managerial persons under Section 36AA of the BR Act 1949. It could also supersede the board under Section 36ACA of the BR Act 1949 or recommend supersession of board.