Tuesday, May 16, 2017

Revised PCA "Prompt Corrective Action" Framework for Banks



The provisions of the revised PCA framework will be effective from April 1, 2017 based on the financials of the banks for the year ended March 31, 2017. The framework would be reviewed after three years.


The salient features of revised PCA Framework for Banks

A.Capital, asset quality and profitability are the key areas for monitoring.
B. Indicators for the same would be CRAR/ Common Equity Tier I ratio, Net NPA ratio and Return on Assets respectively.
C. Leverage would be monitored additionally.
D.Breach of any risk threshold (as detailed under) would result in invocation of PCA.

PCA Matrix
Area
Indicator
Risk
Threshold 1
Risk
Threshold 2
Risk
Threshold
3
Capital

Breach of either CRAR or CET 1 ratio to trigger PCA
CRAR- Minimum regulatory capital to risk
assets ratio + applicable capital conservation buffer (CCB)

current minimum RBI
prescription of 10.25%

And/ Or
Regulatory pre-specified trigger of Common Equity Tier 1 (CET 1 min) + applicable capital conservation buffer(CCB)

current minimum RBI
prescription of 6.75%


<10.25% but
>=7.75%










<6.75%
 but >=5.125%





<7.75%
but
>=6.25%










<5.125%
but
>=3.625%




-












<3.625%




Asset Quality
Net Non-performing Advances
(NNPA) ratio

>=6.0% but
<9.0%

>=9.0%
but
<12.0%

>=12.0%


Profitability
Return on assets (ROA)
Negative ROA for 2
consecutive
years
Negative ROA for 3
consecutive
years
Negative
ROA for 4
consecutive
years
Leverage
Tier 1 Leverage ratio
<=4.0% but
>= 3.5%

(leverage is
over 25 times
the Tier 1
capital)
< 3.5%

(leverage is
over 28.6
times the Tier 1 capital)




*CCB would be 1.875% and 2.5% as on March 31, 2018 and March 31, 2019 respectively.

i)                   Breach of ‘Risk Threshold 3’ of CET1 would invite for resolution through amalgamation, reconstruction, winding up, etc.

ii)                Default in meeting the obligations to depositors, possible resolution processes may be resorted to without reference to the PCA matrix.

E.    The PCA framework would apply to all banks operating in India.
F.    A bank will be placed under PCA based on the audited Annual Financial Results and the Supervisory Assessment made by RBI. However, RBI may also impose PCA during the course of a year where warranted.


Mandatory and discretionary actions

Specifications
Mandatory actions
Discretionary actions
Risk Threshold 1
Restriction on dividend, Distribution /remittance of profits.

Promoters/owners/parent to bring in capital
Common menu
Special Supervisory
Interactions
Strategy related
Governance related
Capital related
Credit risk related
Market risk related
HR related
Profitability related
Operations related
Any other
Risk Threshold 2
In addition to mandatory actions of Threshold 1,

Restriction on branch expansion;

Higher provisions
Risk Threshold 3
In addition to mandatory actions of Threshold 1,

Restriction on branch expansion;

Restriction on management
compensation and directors’ fees,


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, profitability, 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
         RBI to recommend to owners to bring in new management/ Board
         RBI to remove managerial persons under Section 36AA of the BR Act
         RBI to supersede the Board under Section 36ACA of the BR Act 1949/ recommend supersession of the Board
         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.

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 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 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.
Based on RBI circular Dated 13/04/2016. For any further clarification please refer www.rbi.org.in