RBI Notifications

RBI issues revised Prompt Corrective Action (PCA) framework


From UPSC perspective, the following things are important :

Prelims level : PCA framework

Mains level : Paper 3- PCA framework

The RBI has issued a revised Prompt Corrective Action (PCA) framework for banks to enable supervisory intervention at “appropriate time” and also act as a tool for effective market discipline.

What is the PCA framework?

  • 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 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.
  • The last PCA Framework was issued by the RBI on April 13, 2017, and implemented with respect to banks’ financials as of March 31, 2017.

Latest PCA norms

  • The revised PCA framework will be effective from January 1, 2022.
  • Capital, asset quality and leverage will be the key areas for monitoring in the revised framework.
  • That apart, RBI has also revised the level of shortfall in total capital adequacy ratio that would push the lender to “risk threshold three” category.

When exactly does a bank fall into this list?

  • The RBI has specified certain regulatory trigger points with respect to three parameters for the initiation of the process:
  • Capital-to-risk weighted assets ratio (CRAR): It is a measure of a bank’s capital to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements.
  • Net Non-Performing Assets (NPA)
  • Return on assets (RoA): It is an indicator of how well a company utilizes its assets in terms of profitability.

What are the trigger points on capital and how does a breach invite action?


  • 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.
  • Such sectors include the capital markets, real estate or investments in non-statutory liquidity ratio securities.
  • 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.

2. NPA levels

  • 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.

3.Return on assets

  • 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.

Significance of PCA

  • The financial health of a bank: Essentially PCA helps RBI monitor key performance indicators of banks, and taking corrective measures, to restore the financial health of a bank.
  • Averting a crisis: PCA is intended to help alert the regulator as well as investors and depositors if a bank is heading for trouble. The idea is to head off problems before they attain crisis proportions.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Notify of
Inline Feedbacks
View all comments


Join us across Social Media platforms.