The PCA framework puts curbs on financially weak banks with the objective to halt the deterioration of the financial health and reverse the trend.
The Reserve Bank of India’s Board for Financial Supervision, headed by its governor Urjit Patel, on Thursday took stock of the steps taken by 11 public sector banks (PSBs) that are under the central bank’s prompt corrective action (PCA) framework to come out of stress, as it reviewed their financial performance.
The panel is expected to share its recommendations with the RBI’s central board, which will meet on December 14. Speculation is rife that the central bank may, based on its own assessment of the performance of these banks, could relax curbs for a few of them without diluting the PCA framework. The 11 stressed banks make up for 30% of deposits and 29% of advances of all the 21 PSBs.
The PCA framework puts curbs on financially weak banks with the objective to halt the deterioration of the financial health and reverse the trend. They are required to invest mainly in the government securities and other AAA-rated bonds only. These stressed banks face restrictions on distributing dividends and remitting profits when they are put under such a framework. Also, they are stopped from expanding their branch networks and they need to maintain higher provisions.
In its last meeting on November 19, the RBI’s central board had decided that the PCA matter “will be examined by the Board for Financial Supervision of the RBI” (headed by Patel). While the government has been seeking an alignment of the “stringent” PCA norms with the best globally, the RBI has been opposed to any relaxation in the framework.
The high capital-to-risk-weighted-assets ratio (CRAR), retained at 9% as of now, has been a bone of contention between the government and the RBI. The government says it is too stringent and one percentage point higher than the Basel-III requirement. As such, the government believes the PCA framework is very stringent and has called for its alignment with the best globally to allow them some headroom for growth.