FINANCE CURRENT AFFAIRS

NOVEMBER DAY 2
Q.1) RBI has put in place some trigger points to assess, monitor, control and take corrective
actions on banks which are weak and troubled. It is done to ensure that banks don't go bust.
The process or mechanism under which such actions are taken is known as PCA Framework.
What is the full form of PCA?

[a] Process Correction Arrangement

[b] Prior Correction Action
[c] Physical Configuration Audit
[d] Prompt Corrective Action
[e] Priority Collection Action
 Revised PCA Framework And-d

PCA Framework  RBI has recently

announced the
To ensure that banks don't go bust, RBI has put in place some trigger points to revised Prompt Corrective
assess, monitor, control and take corrective actions on banks which are weak and Action (PCA) framework.
troubled. The process or mechanism under which such actions are taken is known as
Prompt Corrective Action, or PCA.  The provisions of the
revised PCA Framework
It is thus the framework under which banks with weak financial metrics are put will be effective from
under watch by the RBI to Assess, Monitor and Control the banks. January 1, 2022.

The PCA is an early intervention package or resolution guideline by the RBI when a
bank turns weak in terms of the identified indicators.

It enables supervisory intervention of RBI over Banks at an appropriate time and

ensures effective market discipline.
Revised Framework

 Applicability
The framework applies to all banks operating in India, including foreign banks operating
through branches or subsidiaries based on breach of risk thresholds of identified
indicators.
However, payments banks and small finance banks (SFBs) have been removed from the
list of lenders where prompt corrective action can be initiated.

 Monitored Areas
Capital, Asset Quality and Leverage will be the key areas for monitoring in
the revised framework.
Indicators to be tracked for Capital, Asset Quality and Leverage would be
 CRAR/ Common Equity Tier I Ratio
 Net NPA Ratio
 Tier I Leverage Ratio
However, the revised framework excludes return on assets as a
parameter that may trigger action under the framework.
 Breach of any risk threshold may result in invocation of PCA.
PCA matrix – Parameters, indicators and risk thresholds
Parameter Indicator Risk Threshold 1 Risk Threshold 2 Risk Threshold
3
(1) (2) (3) (4) (5)
Capital CRAR - Minimum Upto 250 bps More than 250 bps but In excess of 400
(Breach of regulatory prescription below the Indicator not exceeding 400 bps bps below the
either CRAR or for Capital to Risk Assets prescribed at below the Indicator Indicator
column (2) prescribed at column prescribed at
CET 1 ratio) Ratio + applicable Capital
(2) column (2)
Conservation Buffer Upto 162.50 bps
(CCB) below the Indicator More than 162.50 bps In excess of
prescribed at below but not 312.50 bps below
and/or column (2) exceeding 312.50 bps the Indicator
below the Indicator prescribed at
Regulatory Pre-Specified prescribed at column column (2)
Trigger of Common (2)
Equity Tier 1 Ratio (CET 1
PST) + applicable Capital
Conservation Buffer
(CCB)
Breach of either CRAR or
CET 1 ratio to trigger PCA
PCA matrix – Parameters, indicators and risk thresholds
Parameter Indicator Risk Threshold 1 Risk Threshold 2 Risk Threshold 3

(1) (2) (3) (4) (5)

Asset Quality Net Non-Performing >=6.0% but <9.0% >=9.0% but < 12.0% >=12.0%
Advances (NNPA) ratio

Leverage Regulatory minimum Tier 1 Upto 50 bps More than 50 bps but More than 100
Leverage Ratio below the not exceeding 100 bps bps below the
regulatory below the regulatory regulatory
minimum minimum minimum
 Withdrawal of PCA Restrictions

Withdrawal of restrictions imposed will be considered if no breaches in risk

thresholds in any of the parameters are observed as per four continuous quarterly
financial statements and based on Supervisory comfort of the RBI, including an
assessment on sustainability of profitability of the bank.
  When a bank is placed under PCA, one or more of the
following corrective actions may be prescribed:
Mandatory and Discretionary actions
Specifications Mandatory actions Discretionary actions
Risk Threshold 1 Restriction on dividend distribution/remittance of  Special Supervisory Actions
profits.  Strategy related
Promoters/Owners/Parent (in the case of foreign  Governance related
banks) to bring in capital  Capital related
 Credit risk related
 Market risk related
 HR related
Risk Threshold 2 In addition to mandatory actions of Threshold 1,  Profitability related
Restriction on branch expansion; domestic and/or  Operations/Business related
overseas  Any other

Risk Threshold 3 In addition to mandatory actions of Threshold 1 & 2,

Appropriate restrictions on capital expenditure,
other than for technological upgradation within
Board approved limits

1. Special Supervisory Actions
 Special Supervisory Monitoring Meetings
(SSMMs) at quarterly or other identified
frequency
 Special inspections/targeted scrutiny of the bank
 special audit of the bank
 Resolution of the bank by Amalgamation or
Reconstruction
2. Strategy related Actions
RBI to advise the bank’s Board to:
 Activate the Recovery Plan
 Undertake a detailed review of business model.
 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
 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
 RBI to recommend to Owners (Government/ Promoters/ Parent of
foreign bank branch) to bring in new Management/ Board
 RBI to remove managerial persons
 RBI to supersede the Board
 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
 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

5. Credit Risk related Actions
 Preparation of time bound plan and commitment
for reduction of stock of NPAs
 Higher provisions for NPAs/NPIs and as part of
the coverage regime
 Reduction in loan concentrations; in identified
sectors, industries or borrowers 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
7. HR related Actions
 Restriction on staff expansion
 Review of specialized training needs of existing
staff
8. Profitability related Actions
 Restrictions on capital expenditures
 Restrictions/reduction in variable operating costs
9. Operations related Actions
 Restrictions on branch expansion plans; domestic or overseas
 Reduction in business at overseas branches/ subsidiaries
 Restrictions on entering into new lines of business
 Reduction in risky assets
 Restriction/reduction of outsourcing activities
 Restrictions on new borrowings etc
10. Other Actions
Any other specific action that RBI may deem fit considering specific
circumstances of a bank.
 PCA Current Status

Currently only one bank remains under this framework i.e Central Bank of India.

UCO Bank and Indian Overseas Bank were taken out of the purview of PCA
Framework in September 2021.
 Ans-b

Q.2) Which of the following are the key parameters that will be used to track Capital, Asset
Quality and Leverage indicator concerns associated with the Revised PCA Framework 2021?

1. CRAR and CET 1 Ratio

2. Net Non-Performing Advances (NNPA) ratio
3. Regulatory minimum Tier 1 Leverage Ratio
4. Return on Assets Ratio

[a] Only 1
[b] 1,2 and 3
[c] 1,3 and 4
[d] 2, 3 and 4
[e] All the four parameters
 Ans-b

Q.3) Which of the following action is a mandatory action taken when a bank breaches risk 2
threshold and is placed under PCA framework?

1.Restriction on dividend distribution/remittance of profits.

2.Restriction on branch expansion; domestic and/or overseas
3. Appropriate restrictions on capital expenditure

[a] Only 1
[b] 1 and 2
[c] 1 and 3
[d] 2 and 3
[e] All the three
Q.4) Identify the specialized financial institutions that buys the Non Performing Assets
(NPAs) from banks and financial institutions so that they can clean up their balance
sheets. SARFAESI Act, 2002 provides the legal basis for the setting up of these firms in India
and thereby helps in reconstruction of bad assets without the intervention of courts.

[a] Asset Reconstruction Companies [ARCs]

[b] Stressed Asset Resolution Institution [SARI]
[c] NPA Management Company [NMC]
[d] NPA Resolution Institution [NRI]
[e] Asset Resolution Institution [ARI]
 RBI Committee on Asset Ans-a

Reconstruction Companies
Asset Reconstruction Companies are specialized financial
institutions that buys the Non Performing Assets (NPAs) from banks
and financial institutions so that they can clean up their balance What
sheets.  A RBI committee has come out with
a host of suggestions in a bid to
Typically, ARCs buy banks’ bad loans by paying a portion as cash streamline the functioning of Asset
upfront (15% as mandated by the RBI), and issue security receipts Reconstruction Companies (ARCs).
(SRs) for the balance (85%).

This helps banks to concentrate on normal banking activities. Banks,

rather than going after the defaulters by wasting their time and
effort, can sell the bad assets to the ARCs at a mutually agreed value.

The Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest (SARFAESI) Act, 2002 provides the
legal basis for the setting up of ARCs in India and thereby helps in
reconstruction of bad assets without the intervention of courts. ]
  The Committee report has been placed on the RBI website for comments of
stakeholders and members of the public. Comments may be submitted by December
15, 2021 through email. RBI will examine them before taking a final view on the
recommendations made by the Committee.

Why

 The performance of the ARCs has so far remained lacklustre, both in

ensuring recovery and in revival of businesses.
Lenders could recover only about 14.29% of the amount owed by
borrowers in respect of stressed assets sold to ARCs in the 2004-2013
period.
To improve the performance of ARCs, the RBI had appointed the
committee (headed by Sudarshan Sen) to examine the issues and
recommend measures for enabling ARCs to meet the growing
requirements of the financial sector.

 The suggestions are aimed at enabling banks to get rid of stressed loans in
the early stage of default. They will help ARCs Raise Resources.
Tell me more

Some of the committee Recommendations are:

 Online Platform for Sale of Stressed Assets:

Recognising the need for transparency and uniformity of processes in sale of
stressed assets to ARCs, the Committee feels that an online platform may be created
for sale of stressed assets.

 Expanding Scope of SARFAESI Act:

 The scope of Section 5 of the SARFAESI Act may be expanded to allow ARCs to acquire
‘financial assets’, for the purpose of reconstruction, not only from banks and ‘financial
institutions’ but also from such entities as may be notified by the RBI.
 Under these proposed powers, the RBI may consider permitting ARCs to acquire
financial assets from all regulated entities, including Alternative Investment Fund
(AIFs), Foreign Portfolio Investors (FPIs), Asset Management Company (AMCs) making
investment on behalf of Mutual Funds (MFs) and all Non-Banking Financial
Companies (NBFCs).
 Providing Additional Resources:
ARCs are to be allowed to sponsor SEBI-registered Alternative Investment
Funds to raise resources for facilitating restructuring of bad loans purchased
by them.

 Using IBC:
Envisaging ARCs as a prime vehicle for resolution of stressed assets, the
regulations should allow ARCs to also use the Insolvency and Bankruptcy Code
(IBC) framework for this purpose.

 Large Loans for sale to ARCs:

 Large loans and loans that have been in default for over two years should be
considered for sale to ARCs by banks. Final approval of the reserve price should
be given by a high-level committee.
 Reserve price plays a critical role in ensuring true price discovery in auctions
conducted for sale of stressed assets.
 For Ensuring Debt Aggregation:

 The Committee has said that if 66% of lenders (by value) decide to
accept an offer by an ARC, the same may be binding on the remaining
lenders and it must be implemented within 60 days of approval by
majority lenders (66%).
Aggregate Debt means the total of principal and interest that is
owed by the debtor to the creditors at the time of execution of
the debt settlement agreement.
 If a lender fails to agree, it will be subjected to 100% provisioning on the
loan outstanding. Booking a provision means that the bank recognises a
loss on the loan ahead of time.

 For NARCL:
In respect of the proposed National Asset Reconstruction Company
Limited (NARCL) by India for cleaning the books of Public Sector Banks
(PSBs), the RBI should ensure fair competition between the NARCL and
private ARCs to promote the objectives of true price discovery through
the market mechanism.
Thanks For
Watching!!