Question: RBI's Prompt Corrective Action (PCA) Framework — design, triggers, restrictions, and governance significance
Introduction
The Reserve Bank of India's Prompt Corrective Action framework serves as a structured early-intervention mechanism to restore financial health of stressed banks before systemic risks escalate, making it a critical pillar of prudential banking regulation.
Body
1. Scope and Applicability
The PCA framework applies to all Scheduled Commercial Banks operating in India, including Small Finance Banks, but explicitly excludes Regional Rural Banks, Payments Banks, and foreign bank branches. This selective coverage reflects the differential regulatory architecture governing these entities.
2. Key Trigger Indicators
PCA is activated based on three core parameters: Capital to Risk Weighted Assets Ratio (CRAR), Net Non-Performing Assets (NNPA) ratio, and Return on Assets (RoA). Breach of threshold levels in any of these indicators places a bank under the framework, with escalating restrictions corresponding to the severity of breach.
3. Nature of Restrictions — Not Absolute
A common misconception is that PCA bars all fresh lending. In practice, restrictions are calibrated — banks may be prohibited from expanding risk-weighted assets, paying dividends, or opening new branches, but lending is not categorically halted across all borrower segments. Restrictions are graduated and targeted.
4. 2021 Revision
RBI revised the PCA framework in November 2021, extending its applicability to Small Finance Banks and refining threshold parameters. The revision strengthened the framework's forward-looking orientation, emphasising capital adequacy and asset quality as primary supervisory concerns.
Conclusion
An effective PCA framework balances regulatory firmness with operational flexibility — preventing systemic contagion while preserving a bank's capacity for gradual recovery. Periodic recalibration ensures the framework remains responsive to evolving financial sector realities.
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PYQ 2024
Consider the following statements: 1. In India, Non-Banking Financial Companies can access the Liquidity Adjustment Facility window of the Reserve Bank of India. 2. In India, Foreign Institutional Investors can hold the Government Securities (G-Secs). 3. In India, Stock Exchanges can offer separate trading platforms for debts. Which of the statements given above is/are correct?
PYQ
Consider the following statements regarding the Marginal Standing Facility (MSF) of the Reserve Bank of India:
1. The MSF rate is always 25 basis points above the repo rate.
2. Under MSF, banks can borrow funds overnight by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a certain limit.
3. Regional Rural Banks (RRBs) are eligible to access the MSF window.
Which of the statements given above is/are correct?
PYQ
Consider the following statements regarding Sovereign Gold Bonds (SGBs) issued by the Government of India:
1. The interest earned on SGBs is fully exempt from income tax for all categories of investors.
2. Capital gains arising on redemption of SGBs by an individual are exempt from capital gains tax.
3. SGBs can be used as collateral for loans.
4. The price of SGBs at the time of issuance is linked to the price of gold of 999 purity.
Which of the statements given above are correct?
PYQ
With reference to the concept of 'Open Market Operations (OMO)' by the Reserve Bank of India, consider the following statements:
1. When the RBI purchases government securities through OMO, it results in injection of liquidity into the banking system.
2. OMOs are conducted by the RBI as a part of its daily Liquidity Adjustment Facility (LAF) operations.
3. Simultaneous Purchase and Sale of government securities under OMO is referred to as 'Operation Twist'.
Which of the statements given above is/are correct?
PYQ
Consider the following statements about the Government Securities (G-Sec) market in India:
1. The 'When Issued' (WI) market allows trading in G-Secs after their official issuance but before settlement.
2. Retail Direct Scheme of the RBI allows retail investors to directly hold G-Secs in their Gilt accounts with the RBI.
3. Inflation-Indexed Bonds (IIBs) issued by the Government of India are linked to the Consumer Price Index (CPI) for industrial workers.
Which of the statements given above is/are correct?