Consider the following statements regarding Prompt Corrective Action (PCA) Framework 1. Currently PCA supervisory norms are applicable to both Government and non-Government NBFC’s. 2. Discretionary actions under PCA include Restriction on Branch Expansion How many of the statements given above are correct?

Official answer key: A. The answer shown above (D) is the academy’s own.

• The Prompt Corrective Action (PCA) Framework is a supervisory tool used by the Reserve Bank of India (RBI) to maintain the health of banks and ensure the stability of the banking system.
• The PCA framework is aimed at identifying banks with weak financials and preventing further deterioration by enforcing corrective actions.
• It applies to both public and private sector banks, based on specific financial indicators like capital adequacy, asset quality, profitability, and leverage.
• The RBI decided to extend the PCA framework for NBFC’s (except those in base layer) with effect from October, 2024. Only the government owned NBFC’S are put under the PCA framework. Hence, statement 1 is incorrect.

• The RBI monitors banks' performance based on specific metrics, and if these fall below certain thresholds, the bank is placed under the PCA framework.

The key indicators include

• Capital Adequacy Ratio (CAR): When a bank's CAR falls below prescribed levels (such as under Basel III norms).
• Net Non-Performing Assets (NNPA): High levels of NPAs (bad loans) indicate a bank's asset quality is deteriorating.
• Return on Assets (RoA): A negative RoA shows that a bank is not generating sufficient profits.
• Leverage Ratio: If a bank's leverage exceeds a certain threshold, it indicates a risk to financial stability.
• Corrective Actions: The framework prescribes two types of corrective actions:
• Mandatory Actions: These include restrictions on dividend payments, branch expansions, and directors' compensation.
• Discretionary Actions: The RBI may impose additional restrictions, such as limitations on lending, reduction in risky assets, or bringing in new management. Hence, statement 2 is incorrect.