Revised Prompt Corrective Action (PCA) framework for banks
The Reserve Bank of India RBI has further tightening rules on banks with a fresh set of “Prompt corrective action” guidelines which it has released on Thursday. The new guidelines are seen as a move to address bad loans.
In these rules, the RBI is threatening to place some strict restrictions on weak banks by cracking down on branch expansion and even promoter compensation.
According to the guidelines, any bank with net NPAs between six and nine percent of their total loan book, and a negative return on assets for two straight years, may have to face restrictions on dividend and profit remittances. They may also have to get capital from from promoters of foreign banks.
Banks with a net NPA between 9-12 percent and three straight years of negative returns will have to face some restrictions with respect to branch expansions.
Banks with net NPA exceeding 12 percent and four continuous years of negative Return on Assets (ROAs) may see restrictions on management’s compensation and also closure of the bank in some extreme cases.
Revised Prompt Corrective Action (PCA) framework for banks
The salient features of revised PCA framework for banks
A. Capital, asset quality and profitability continue to be the key areas for monitoring in the revised framework.
B. Indicators to be tracked for Capital, asset quality and profitability would be CRAR/ Common Equity Tier I ratio1, Net NPA ratio2 and Return on Assets3 respectively.
C. Leverage would be monitored additionally as part of the PCA framework.
D. Breach of any risk threshold (as detailed under) would result in invocation of PCA.
Common menu for selection of discretionary corrective actions
1. Special Supervisory interactions
Special Supervisory Monitoring Meetings (SSMMs) at quarterly or other identified frequency
Special inspections/targeted scrutiny of the bank
Special audit of the bank
2. Strategy related actions
RBI to advise the bank’s Board to:
Activate the Recovery Plan that has been duly approved by the supervisor
Undertake a detailed review of business model in terms of sustainability of the business model, profitability of business lines and activities, medium and long term viability, balance sheet projections, etc.
Review short term strategy focusing on addressing immediate concerns
Review medium term business plans, identify achievable targets and set concrete milestones for progress and achievement
Review all business lines to identify scope for enhancement/ contraction
Undertake business process reengineering as appropriate
Undertake restructuring of operations as appropriate
3. Governance related actions
RBI to actively engage with the bank’s Board on various aspects as considered appropriate
RBI to recommend to owners (Government/ promoters/ parent of foreign bank branch) to bring in new management/ Board
RBI to remove managerial persons under Section 36AA of the BR Act 1949 as applicable
RBI to supersede the Board under Section 36ACA of the BR Act 1949/ recommend supersession of the Board as applicable
RBI to require bank to invoke claw back and malus clauses and other actions as available in regulatory guidelines, and impose other restrictions or conditions permissible under the BR Act, 1949
Impose restrictions on directors’ or management compensation, as applicable.
4. Capital related actions
Detailed Board level review of capital planning
Submission of plans and proposals for raising additional capital
Requiring the bank to bolster reserves through retained profits
Restriction on investment in subsidiaries/associates
Restriction in expansion of high risk-weighted assets to conserve capital
Reduction in exposure to high risk sectors to conserve capital
Restrictions on increasing stake in subsidiaries and other group companies
5. Credit risk related actions
Preparation of time bound plan and commitment for reduction of stock of NPAs
Preparation of and commitment to plan for containing generation of fresh NPAs
Strengthening of loan review mechanism
Restrictions on/ reduction in credit expansion for borrowers below certain rating grades
Reduction in risk assets
Restrictions on/ reduction in credit expansion to unrated borrowers
Reduction in unsecured exposures
Reduction in loan concentrations; in identified sectors, industries or borrowers
Sale of assets
Action plan for recovery of assets through identification of areas (geography wise, industry segment wise, borrower wise, etc.) and setting up of dedicated Recovery Task Forces, Adalats, etc.
6. Market risk related actions
Restrictions on/reduction in borrowings from the inter-bank market
Restrictions on accessing/ renewing wholesale deposits/ costly deposits/ certificates of deposits
Restrictions on derivative activities, derivatives that permit collateral substitution
Restriction on excess maintenance of collateral held that could contractually be called any time by the counterparty
7. HR related actions
Restriction on staff expansion
Review of specialized training needs of existing staff
8. Profitability related actions
Restrictions on capital expenditure, other than for technological upgradation within Board approved limits
9. Operations related actions
Restrictions on branch expansion plans; domestic or overseas
Reduction in business at overseas branches/ subsidiaries/ in other entities
Restrictions on entering into new lines of business
Reduction in leverage through reduction in non-fund based business
Reduction in risky assets
Restrictions on non-credit asset creation
Restrictions in undertaking businesses as specified.
Any other specific action that RBI may deem fit considering specific circumstances of a bank.