Prompt Corrective Action Framework

The Prompt Corrective Action (PCA) framework is the Reserve Bank of India’s system for intervening when a bank’s financial health weakens beyond specified limits. It uses indicators of financial soundness to trigger supervisory restrictions and corrective measures, so that problems are addressed before they become more serious.

Indicators and risk thresholds

Under the RBI’s revised framework issued in 2021, the key monitoring areas for banks are capital, asset quality and leverage. These indicate whether a bank has adequate financial buffers, excessive bad loans or excessive leverage.

• Capital is assessed through the capital to risk-weighted assets ratio and the Common Equity Tier 1 ratio, which measure capital relative to risk-weighted assets.
• Asset quality is assessed through the net non-performing assets ratio, which indicates the burden of bad loans after accounting for provisions.
• Leverage is assessed through the Tier 1 leverage ratio, which compares Tier 1 capital with the bank’s exposure measure.
• Breaches of prescribed limits place a bank within specified risk thresholds; progressively higher thresholds attract more stringent corrective measures.

Restrictions and corrective measures

PCA combines mandatory restrictions linked to risk thresholds with discretionary supervisory action. Its purpose is to restore financial soundness, not merely to penalise a bank.

• Mandatory measures include restrictions on dividend distribution or profit remittances and requirements for promoters or owners to bring in capital.
• Higher risk thresholds add restrictions on branch expansion and, at the most severe threshold, capital expenditure, subject to specified exceptions.
• The RBI may also require changes in strategy, governance or management, restrict risky business activities, and strengthen monitoring.
• Corrective efforts may include raising capital, recovering bad loans, reducing risky exposures and improving operational efficiency.

Exit and significance

PCA is an early-intervention framework, not an automatic declaration of insolvency. Placement under PCA does not, by itself, impose a moratorium on deposit withdrawals.

• For withdrawal of PCA restrictions, the bank must show no breach of the relevant risk thresholds in four consecutive quarterly financial statements, including one audited annual financial statement.
• Exit also depends on the RBI’s supervisory assessment that the improvement is sustainable.
• The framework supports depositor protection and financial stability, although restrictions can constrain the affected bank’s business expansion during recovery.