GS Paper III

News Excerpt:

The Reserve Bank of India (RBI) has introduced a new prompt corrective action (PCA) framework for urban cooperative banks (UCBs), effective from April 1, 2025.

More detail about the news:

• This framework aims to enable timely supervisory intervention, allowing for the design of entity-specific supervisory action plans based on individual risk assessments.

Supervisory Action Framework (SAF):

• Previously, the RBI had issued a SAF as an early intervention tool to improve the condition of weak UCBs or those under financial stress. The SAF was last updated in January 2020.
• The PCA framework will replace the SAF. 
• PCA framework will provide the flexibility to create supervisory action plans tailored to specific entities based on case-by-case risk assessments.
• It is largely principle-based, featuring fewer parameters compared to the SAF, yet maintaining rigorous supervision.

Similar Frameworks for Banks and Non-banks

• The new PCA framework has been harmonized with similar frameworks for commercial banks and non-banks, with suitable modifications to maintain the principle of proportionality.
• The revised framework is designed to focus more on larger UCBs that require intensive monitoring, optimizing the use of supervisory resources.

More About PCA NormsThe PCA framework is now applicable to all UCBs in Tier 2, Tier 3, and Tier 4 categories.

• Tier 1 UCBs are excluded from the PCA framework for now but will remain under enhanced monitoring as per the existing supervisory framework.
• The RBI places regulated entities under PCA when they fail to meet minimum regulatory requirements for the capital adequacy ratio (CRAR), non-performing assets (NPAs), and profitability.
• Under the PCA framework, co-operative banks with a net NPA ratio of 6-12% can be subjected to restrictions.
• UCBs with net losses for two consecutive years can also be placed under this framework.
• RBI has prescribed multiple risk thresholds for invoking PCA for breach of Capital to Risk-weighted Asset Ratio (CRAR).

Restriction Under PCA

• Once under the framework, the RBI will impose strict business restrictions on the UCB, including barring it from raising capital from existing members and issuing equity or other capital instruments.
• The RBI will also prevent UCBs from giving dividends to shareholders or making donations. Appropriate restrictions on capital expenditure, excluding technology upgrades, will be imposed.
• The RBI may also prohibit the UCB from expanding its branch network or increasing the total deposit base.
• Discretionary actions, such as conducting special audits, governance checks, HR measures, and even canceling banking licenses, could be taken by the RBI once a UCB is placed under the PCA framework.