RBI spells out rules for a bank to exit prompt corrective action framework

RBI spells out rules for a bank to exit prompt corrective action framework

The Reserve has modified the prompt corrective action plans for weaker banks with it laying down criteria for a bank to exit the framework once its financial metrics improve. It has also removed the profitability parameter for invoking the regulatory action.

The revised framework will be effective from January next year. The existing one has been in vogue since April 1, 2017. Under the existing rules, as many as 12 banks were placed under restrictions after they crossed the tolerance threshold. Barring one, all banks have exited the framework over the last two years but no uniform policy was applied for their exit. For example, RBI removed PCA from Bank of India and

in January 2019 after their net non-performing assets ratio fell below the risk threshold of 6%.

But they were not profitable when the restrictions were lifted. In contrast, the erstwhile Oriental Bank of Commerce was profitable but its NPA was higher than 6% at the time PCA was removed from it. With the introduction of the structured exit policy, RBI has tried to address this anomaly. Under the existing framework, RBI invokes PCA if a bank makes net loss for consecutive financial years.

This clause has been removed in the revised guidelines. Once a bank is placed under PCA, taking the bank out of PCA framework and /or withdrawal of restrictions imposed under it will be considered if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements, one of which should be audited annual financial statement, RBI said Tuesday.

However, any exit from the framework would depend on RBI’s supervisory comfort of the RBI and assessment on sustainability of profitability of the bank. The regulator has also tweaked the capital norm and leverage rules. The objective of the PCA framework is to enable supervisory intervention at appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner, so as to restore its financial health, RBI said.

“The PCA framework is also intended to act as a tool for effective market discipline,” it said. These rules however do not preclude the regulator from taking any other action as it deems fit at any time, in addition to the corrective actions prescribed in the framework, which is applicable to all banks operating in India including foreign banks operating through branches or subsidiaries.

A bank is generally placed under the framework based on the audited annual financial results. However this does not bar RBI from imposing restrictions on any bank during the course of a year in extreme cases.

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