What is RBI's prompt corrective action?

RBI has imposed prompt corrective action (PCA) on Allahabad Bank for non-fulfillment of the regulatory requirements regarding adequate capital, rising NPA’s and return on assets on Wednesday. Almost half of public sector banks are under RBI’s watch of prompt corrective action. PSU’s have been hardly hit on all three fronts under PCA due to rising NPA’s consequently impacting profitability due to elevated provisions. However, there has been many false rumours regarding PCA which are misguiding investors. Here is short brief about what is PCA

RBI considers three parameters for initiating PCA on a certain bank. The three parameters include (CRAR) Capital to risk weighted assets ratio, (NPA) net non-performing assets and (ROA) return on assets. The PCA is only applicable on commercial banks and not on NBFC’s, co-operative banks and FMI’s.

CRAR- CRAR has been classified further into three categories and RBI has assigned restrictions on these respective categories accordingly. Banks need to maintain CRAR of at least 9 per cent failing which banks can get under various restrictions, including amalgamation or merger of banks with CRAR below 6 per cent.

NPA- The net non-performing assets as percentage to total advances should not exceed 15% failing which banks may not expand credit to new lines of business, make dividend payments, increase stake in subsidiaries, etc.

ROA- Return on assets should not be less than 0.25 per cent failing which banks would not be able to access costly deposits and CD’s. Also, banks may not be able to borrow from interbank market, expand staff, etc