Prompt Corrective Action Framework

Definition

The objective of the Prompt Corrective Action (PCA) framework is to ensure that banks take timely and guided corrective measures to restore their financial health and make their balance sheets stronger.

Context

A bank may be placed under the PCA framework on the basis of the audited financial results and the supervisory assessment made by the supervisory authorities (SREP). Key indicators used for evaluation and invocation of the PCA framework are

• the capital adequacy ratio
• Common Equity Tier 1 (CET1) ratio,
• asset quality – non-performing assets (net NPA ratio)
• profitability (return on assets) and
• Tier 1 leverage ratio.

These indicators are placed in a PCA matrix to identify the breach and the extent of breach ranging from 1 to 3 (worst). For a breach of any of the above thresholds, PCA can be invoked and corrective action can be triggered. The PCA framework applies without exception to all banks operating in the jurisdiction, including small banks and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.

Actions prescribed to banks include:

• arranging for an infusion of capital;
• restriction of dividend distributions;
• realising the value from the sale of non-core assets;
• reduction of high risk-weighted assets (RWAs);
• a plan to reduce NPAs and contain generation of new NPAs;
• dedicated efforts to increase recoveries;
• reducing credit concentrations in identified sectors, industries and borrowers;
• improving the provision coverage ratio;
• reducing bulk deposits;
• improving low-cost deposits; and
• a restriction on branch expansion and certain capital expenditure.

With a breach graded 3 (the most severe level), a bank becomes a candidate for Resolution through amalgamation, reconstruction or winding-up.