The Reserve Bank of India has put Bank of India under watch for high bad loans by initiating Prompt Corrective Action (PCA) against it. But there are nine other banks against which PCA has been initiated. We also explain what Prompt Corrective Action is.
The Reserve Bank of India has put Bank of India under watch for high bad loans by initiating prompt corrective action against it, a move that will place various restrictions on the lender, including on fresh loans and dividend distribution. But Bank of India comes 10th in the list of Public Sector Banks against which the central bank has initiated prompt corrective action.
What is Prompt Corrective Action?
Basically, the Prompt Corrective Action (PCA) framework is for taking corrective action at an earlier stage when banks run into difficulties. For this, the banks are assessed on three grounds– asset quality, profitability and capital ratios.
When banks are found to be having low capital adequacy or high non-performing assets (NPA), these are called Trigger Points. RBI takes such action when Capital Adequacy Ratio goes down to less than 9% and non-performing assets go up to more than 10%. The RBI puts various restrictions on the lender, including on fresh loans and dividend distribution under the Prompt Corrective Action. The actions could include stricter norms for lending, branch expansion, management change and asset reduction.
Banks and their NPAs
The RBI tightened the threshold for banks as the bad loans situation in the country was escalating. Hailing the PCA framework, rating agency Fitch said that it suggested a greater willingness to regulatory action to address problems of struggling banks. “The RBI may use the PCA framework to identify weak banks as candidates for mergers,” Fitch said. ICRA estimates that with PCA framework, the net NPA ratio of banks is likely to improve to around 4.4% by March 2018 from about 5.8% in September this year.