Bank Management Assignment

Riwaz Shrestha
1920623
5 BBA F

Find and read the available materials on Prompt Corrective Action by RBI on Commercial
Banks and submit a page write on your understanding.

As part of the prompt corrective action (PCA) Framework, the Reserve Bank has specified
certain regulatory trigger points in terms of three parameters, namely capital to risk weighted
assets ratio (CRAR), net non-performing assets (NPA), and Return on Assets (RoA), for the
initiation of certain structured and discretionary actions in respect of banks that meet such
trigger points. The PCA framework only applies to commercial banks and does not apply to
cooperative banks, non-banking financial firms (NBFCs), or financial management
institutions (FMIs).

As part of the ongoing efforts to improve the existing supervisory framework, we suggest
implementing a system of Prompt Corrective Action (PCA) based on pre-determined rule-
based structured early intervention. The Basel Committee's 1997 "Core Principles for
Effective Banking Supervision," which were intended to guide supervisory authorities in
strengthening their current supervisory regime, also emphasized the importance of
supervisors having adequate supervisory measures at their disposal, backed up by legal
sanctions, to bring about timely correction.

The Bank's PCA scheme was discussed with a select group of bankers. A discussion paper on
PCA, created with the preliminary opinions of these bankers in mind, was posted on the
Internet for wider distribution, discussion, and debate. A press release was also made on the
foregoing. Bankers and others were asked to provide suggestions and comments on the
proposed PCA scheme. The scheme has been revised in response to feedback, comments, and
suggestions from bankers and others. While certain actions may be initiated by the RBI on its
own, others must be initiated in consultation with and with the approval of the Government of
India. In addition to the existing measures, the PCA scheme is proposed to be implemented as
a supervisory tool. According to the scheme, a schedule of corrective actions has been
developed based on three parameters, namely CRAR, Net NPAs, and Return on Assets
(RoA), which represent the three important parameters, namely capital adequacy, asset
quality, and profitability. Certain trigger points for the PCA framework have been established
under the three parameters, taking into account the feasibility of implementing certain
measures in the Indian context. Triggers based on CRAR, Net NPAs, and ROA are linked to
a bank's performance in three quantifiable areas that form an integral part of supervisory
oversight.