The Reserve Bank of India took Indian Overseas Bank out of the Prompt Corrective Action Framework on September 29. The bank’s shares surged 20 percent a day later as shareholders gave a thumbs-up to the regulator’s decision.
What is PCA?
Prompt Corrective Action Framework refers to the central bank’s watchlist of weak banks. The regulator imposes restrictions like curbs on lending on such banks. The PCA Framework applies only to commercial banks and does not cover cooperative banks and non-banking financial companies.
When was IOB brought under PCA?
The RBI placed IOB under the PCA Framework in October 2015. The bank had been requesting the central bank to take it out of the framework.
Why did RBI take IOB out of the PCA?
The Board for Financial Supervision reviewed IOB’s performance and noted that as per its published results for the year ended March 31, 2021, the bank was not in breach of PCA parameters, the RBI said.
The bank also provided a written commitment that it would comply with norms pertaining to minimum regulatory capital, net non-performing assets and leverage ratio on an ongoing basis, the RBI said. Taking these factors into consideration, the RBI decided to lift PCA restrictions on IOB, subject to certain conditions and continuous monitoring.
Has the government supported IOB?
Yes. State-owned IOB received Rs 4,100 crore from the government.
When was PCA introduced?
The RBI’s PCA Framework was introduced in December 2002 as a structured early intervention mechanism along the lines of the US Federal Deposit Insurance Corporation’s PCA framework. Subsequently, the RBI reviewed the framework, keeping in view international best practices and recommendations of the Working Group of the Financial Stability and Development Council on Resolution Regimes for Financial Institutions in India (January 2014) and the Financial Sector Legislative Reforms Commission (March 2013).
The revised PCA Framework was issued by the RBI on April 13, 2017, and implemented with respect to banks’ financials as of March 31, 2017.
When exactly does a bank fall into this list?
The RBI has specified certain regulatory trigger points with respect to three parameters, i.e., capital-to-risk weighted assets ratio (CRAR), net non-performing assets (NPA) and return on assets (RoA) for the initiation of the process.
What are the trigger points on capital and how does a breach invite action?
There are various stages. If CRAR falls to less than 9 percent, the RBI asks banks to submit a capital restoration plan, restricts new businesses and dividend payments.
The RBI also orders recapitalisation, restrictions on borrowings from the inter-bank market, reduction of stake in subsidiaries and reduction of exposure to sensitive sectors like the capital markets, real estate or investments in non-statutory liquidity ratio securities.
What if CRAR falls below 6 percent?
If CRAR is less than 6 percent but equal to or more than 3 percent, the RBI could take additional steps if the bank fails to submit a recapitalisation plan. These measures include bringing in a new management/board, appointing consultants for business/organisational restructuring, taking steps to change ownership and also initiating the process for merger of the bank.
What if CRAR falls below 3 percent?
If CRAR is less than 3 percent, in addition to the actions upon hitting the first and second trigger points, closer monitoring and steps to merge/amalgamate/liquidate the bank or impose a moratorium on the bank, if its CRAR does not improve beyond 3 percent within one year or within such extended period, will follow.
Okay. What about NPA levels?
That’s the second part of the trigger. If net NPAs rise beyond 10 percent but are less than 15 percent, a special drive to reduce bad loans and contain the generation of fresh NPAs begins. The RBI reviews the bank’s loan policy and takes steps to strengthen credit-appraisal skills.
Subsequently, the follow-up of advances and suit filed/decreed debt starts. Also, the RBI puts in place proper credit-risk management policies and will reduce loan concentration. Further, there will be restrictions on entering new lines of business, making dividend payments and increasing its stake in subsidiaries.
What if net NPAs shoot up above 15 percent?
In addition to the actions upon hitting the initial trigger point, the bank’s board is called for discussion on the PCA.
What about RoA?
Return on assets is the third parameter. If RoA is less than 0.25 percent, restrictions on accessing/renewing costly deposits and CDs kick in and the RBI bars the bank from entering new lines of business. The bank’s borrowings from the inter-bank market, making dividend payments and increasing staff will be restricted.
(This is an updated version of an earlier copy)