RBI Revises Prompt Corrective Action Framework For Banks

The Reserve Bank of India announced a revised Prompt Corrective Action framework for banks on Tuesday, the provisions of which will be effective from Jan. 1, 2022.

The revised framework excludes return on assets as a parameter which may trigger action under the framework. Payments banks and small finance banks have also been removed from the list of lenders where prompt corrective action can be initiated, it said in a statement.

Capital adequacy, asset quality and leverage will be the key areas for monitoring of banks under the revised framework. In the framework's previous iteration announced in April 2017, the RBI had also included profitability as a parameter, tracking the return on assets for a bank.

The RBI has retained the thresholds for the three parameters from the previous framework. Breach of any risk threshold may result in invocation of PCA, the statement said.

The prompt corrective action framework puts restrictions on lending, business growth or any other capital consumption activities by a bank. It's used as a framework for a lender to address the stress on its balance sheet and adequately put in place systems and controls to avoid future problems.

Exiting the framework requires a bank to either not be in breach of any of the risk thresholds mentioned earlier, or for the RBI's supervisory audit to show adequate improvement in financials.

Over the last two years, most lenders which were placed under the corrective framework have exited, either due to large-scale amalgamation of state-run banks, or through improved performance. Indian Overseas Bank was the latest lender to exit the framework in September. Central Bank of India remains the sole lender under the restrictive framework now.