Placing banks under the Prompt Corrective Action (PCA) framework will not affect their normal operations, said the RBI on Friday.
The Reserve Bank of India statement comes in the wake of media reports about the closure of some public sector banks, post their being placed under the PCA framework.
Terming the PCA as one among the various “measures/tools to maintain sound financial health of banks,” the RBI said that the framework involves “monitoring of certain performance indicators of banks as an early warning exercise and is initiated once such thresholds as relating to capital, asset quality, etc., are breached.”
The PCA is intended to help banks take timely corrective measures, including those prescribed by the RBI. The PCA framework also keeps the RBI focussed on such banks by engaging with their managements in ‘trouble areas’. It encourages banks to avoid risky activities and focus on conserving capital to strengthen their balance-sheet.
The PCA framework is based on the ‘to act before it’s too late’ principle, according to RBI’s report on Trends and Progress of Banking in India. “PCA’s core lies in a sequence of increasingly harsh restrictions as the problem worsens so that banks have little incentive to delay corrective action. It reduces the moral hazard associated with the Lender-of-Last-Resort (LOLR) and makes banks liable to improve their overall financial health,” the RBI said.
Public sector banks placed under the PCA framework include Indian Overseas Bank, Dena Bank, Corporation Bank, Central Bank of India, IDBI Bank, UCO Bank, United Bank of India, Bank of Maharashtra, Oriental Bank of Commerce, and Bank of India.