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Scheme of Prompt Corrective Action (PCA) - Gist of
Mandatory/Discretionary Provisions Applicable according to the Trigger Points
The Reserve Bank of India will initiate certain Structured Actions in respect of the banks which have hit the Trigger Points in terms of CRAR, Net NPA and ROA. The Reserve Bank, at its discretion, will resort to additional actions (Discretionary Actions) as indicated under each of the Trigger Points. The Trigger Points, as well as Structured and Discretionary Actions are indicated below:
Structured Actions in terms of Trigger Points
CRAR
CRAR less than 9%, but equal or more than 6%
The situation implies that the bank fails to comply with the minimum regulatory CRAR of 9%, which exhibits its inability to absorb future shocks. The poor capital base is exacerbated by low earnings, heavy provisioning requirements due to high level of NPAs, high intermediation costs, asset-liability mismatches and bank's strong appetite for risky assets. It also exhibits bank's inability to access the capital market. In such cases, the bank is not in a position to gainfully expand its asset base for improving profitability. The bank's flexibility to operate in inter bank and overseas markets would be severely restricted, forcing the bank to adopt narrow banking. CRAR less than 6%, but equal or more than 3%
It showed further deterioration in capital base due to combination of factors, such as continuous losses, heavy provisioning requirements due to precarious asset quality, failure to adjust risk-weighted assets due to illiquidity, promoters' inability to bring in additional capital, etc. indicating higher possibility of bank failure. CRAR less than 3%
This indicates all-round deterioration in capital adequacy, which may have arisen out of very poor asset quality and earnings of the bank. It also shows the inability of the existing management to infuse fresh capital, which point to the fact that induction of new management with adequate resources is the only solution to restore the position. Given the asset quality problem and poor earnings, the possibility of a quick turnaround is ruled out. Immediate injection of capital is only alternative to avert the failure.
NPAs
Poor asset quality is due to deficiencies in credit administration, i.e. sub-standard credit appraisal, follow-up and recovery of loan assets and weaknesses in credit risk management. Lack of adequate income inhibits the banks from making provisions as per regulatory requirements. As such, to reduce the net NPAs, the steps needed are: a clear cut loan as well as recovery policy, drive for recovery of NPAs, upgradation of skills, revamping of credit administration and risk management systems and entertaining only high quality proposals. A sound Loan Review Mechanism needs to be in place to protect the quality of loan portfolio. Expanding avenues to generate fee- based income and measures for containment of costs would also be desirable to ensure that banks make adequate provisions.
The set of mandatory and discretionary actions for the two zones are as under:
Net NPAs over 10% but less than 15%
Net NPAs in excess of 10% clearly demonstrates the poor asset quality of banks, which will have serious implications not only for current earnings but also its future income. Such banks' charge on Net Interest Income for loan loss provisioning / write off will be substantial. Further, the situation may also lead to serious provisioning implications in future due to migration of such NPAs into higher categories. The huge stock of NPAs forces the banks place their entire credit administration machinery in dealing with problem loans with little time for follow-up of other assets. This may also prevent the bank from undertaking profitable loan business. In a few cases, banks may be tempted to take on risky loans for generating more income, leading to adverse selection. High NPAs will also restrict the banks' flexibility in assuming interest rate and exchange rate risks, even under favourable environment. The coverage ratio of such banks will be at a very unsustainable level. Net NPAs 15% and
It shows structural weaknesses in loan policy / administration and inability of banks to adequately provide for loan impairment. Also, such banks have little or no scope or inclination to provide for more than the regulatory provisioning requirements. It could be possible that the sub-standard assets constitute a significant portion of the NPAs. In such an event, the bank may have to face the situation of making higher provisioning requirements in future due to migration of sub-standard advances to lower categories. Such banks will have limited flexibility in absorbing future shocks and undertaking profitable business. The earning potential is severely restricted, with limited scope for internal generation of capital. In pursuit for higher income, such banks could be assuming low quality assets, which may lead to adverse selection.
Action based on Return on Assets (ROA)
Return on Assets is one of the important indictors of the overall efficiency of banks. ROA comes down due to various factors such as high non performing assets, low fee- based income, high intermediation costs due to overstaffing, etc. Proposed actions aim at improving the income and containing expenses, reduction of high cost deposits, possible reduction in high level of provisioning / write off and tapping of avenues to increase fee based income.
ROA below 0.25%
ROA at less than 0.25% indicates abysmal productivity of assets. The lower ROA may also be due to unsustainable level of NPAs, high cost-income ratio due to heavy non-operating expenditure including staff expenditure and inability of the bank to tap off-balance sheet business opportunities. It could be possible that the bank suffered losses on account of interest rate and currency mismatches. Imprudent pricing of assets and liabilities without reckoning cost -yield relationship also leads to lower ROA. Raising the ROA requires restructuring of asset-liability profile, scientific pricing, undertaking fee-based activities, control over non-operating expenditure and reduction of NPAs to contain provisioning level within reasonable range.
Structured and Discretionary Actions
CRAR less than 9%, but equal or more than 6%
Structured Actions
Submission and implementation of capital restoration plan by the bank Bank will restrict expansion of its risk-weighted assets Bank will not enter into new lines of business Bank will not access / renew costly deposits and CDs Bank will reduce / skip dividend payments
Discretionary Actions
RBI will order recapitalisation Bank will not increase its stake in subsidiaries Bank will reduce its exposure to sensitive sectors like capital market, real estate or
investment in non-SLR securities RBI will impose restrictions on the bank on borrowings from inter bank market Bank will revise its credit / investment strategy and controls
CRAR less than 6%, but equal or more than 3%
Structured Actions
All Structured actions as in earlier zone Discussion by RBI with the bank's Board on corrective plan of action RBI will order recapitalisation Bank will not increase its stake in subsidiaries Bank will revise its credit / investment strategy and controls
Discretionary Actions
Bank / Govt. to take steps to bring in new Management / Board Bank will appoint consultants for business / organisational restructuring Bank / Govt. to take steps to change promoters / to change ownership RBI / Govt. will take steps to merge the bank if it fails to submit / implement recapitalisation
plan or fails to recapitalise pursuant to an order, within such period as RBI may stipulate
CRAR less than 3% Structured Actions
All Structured actions as in earlier zone RBI will observe the functioning of the bank more closely RBI / Govt. will take steps to merge / amalgamate / liquidate the bank or impose moratorium on the bank if its CRAR does not improve beyond 3% within one year or within such extended period as agreed to.
Actions based on Net NPAs
Net NPAs over 10% but less than 15%
Structured Actions
Bank to undertake special drive to reduce the stock of NPAs and contain generation of fresh NPAs Bank will review its loan policy Bank will take steps to upgrade credit appraisal skills and systems Bank will strengthen follow-up of advances including loan review mechanism for large loans Bank will follow-up suit filed / decreed debts effectively Bank will put in place proper credit-risk management polices / process / procedures /prudential limits Bank will reduce loan concentration - individual, group, sector, industry, etc.
Discretionary Actions
Bank will not enter into new lines of business Bank will reduce / skip dividend payments Bank will not increase its stake in subsidiaries
Net NPAs 15% and above
Structured Actions
All Structured actions as in earlier zone Discussion by RBI with the bank's Board on corrective plan of action Bank will not enter into new lines of business Bank will reduce / skip dividend payments Bank will not increase its stake in subsidiaries
ROA less than 0.25%
Structured Actions
Bank will not access / renew costly deposits and CDs Bank will take steps to Increase fee-based income Bank will take steps to contain administrative expenses Bank will launch special drive to reduce the stock of NPAs and contain generation of fresh
NPAs Bank will not enter into new lines of business Bank will reduce / skip dividend payments RBI will impose restrictions on the bank on borrowings from inter bank market
Discretionary Actions
Any other action
Nothwithstanding anything contained in the PCA framework, the Reserve Bank reserves
the right to direct a bank to take any other action or implement any other direction, in the interest
of the concerned bank or in the interest of its depositors.
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