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RBI’s Prompt Corrective Action (PCA) Framework

Prompt Corrective Action (PCA) for Government NBFCs

  • Context (MINT I HBL): RBI has decided that the Prompt Corrective Action (PCA) framework will apply to Government NBFC except those in the base layer with effect from October 1, 2024.
  • NBFCs are classified into four categories based on their size, activity, and perceived riskiness:
    1. Base Layer NBFCs
    2. Middle Layer NBFCs
    3. Upper Layer NBFCs
    4. Top Layer NBFCs
  • The RBI PCA considers banks risky if they fall below certain thresholds on three parameters:
    1. Asset Quality / Non-Performing Assets (NPAs)
    2. Capital (BASEL Capital Adequacy Ratio (CRAR))
    3. Leverage (BASEL Tier 1 Capital Ratio)
Indicator Risk Threshold-1 Risk Threshold-2 Risk Threshold-3
CRAR <15% but ≥12% <12% but ≥9% <9%
Tier I Capital Ratio <10% but ≥8% <8% but ≥6% <6%
NNPA Ratio >6% but ≤ 9% >9% but ≤12% >12%
  • The RBI can invoke a corrective action plan in breach of the risk thresholds.

Non-Performing Assets (NPAs)

  • NPAs are loans that cease to generate income for lenders due to borrowers’ failure to repay principal and interest within 90 days.
  • There are different types of NPAs depending on how long they remain in the NPA category, including sub-standard assets, doubtful assets, and loss assets.
    • Sub-standard Assets: Assets that have been classified as NPA for a period of 12 months or less.
    • Doubtful Assets: Assets that have been NPA for more than 12 months.
    • Loss Assets: These are loans where the bank or auditor has identified losses but the amount has not been written off wholly repaid.

BASEL Capital Adequacy Ratio

  • Capital to Risk (Weighted) Assets Ratio (CRAR) indicates a bank’s ability to meet its obligations.
  • The minimum ratio of CRAR is 8% under Basel II and 10.5% under Basel III.
  • A high CAR indicates that a bank has a large enough financial cushion.

BASEL Tier 1 Capital

  • Tier 1 and tier 2 capital are two types of assets banks hold.
  • Tier 1 capital refers to a bank’s core capital, which includes equity capital and disclosed reserves.
  • It is used to measure a bank’s capital adequacy and is the primary funding source of the bank.
  • This capital can absorb losses immediately when they occur, allowing the bank to continue operating.
  • Under Basel III, a bank’s Tier 1 capital must be at least 6% of its risk-weighted assets.

RBI PCA considers banks risky if they fall below certain thresholds on three parameters

Prompt Corrective Action (PCA) Framework

  • The PCA Framework, established by the RBI in 2002, ensures the stability of banks and NBFCs.
  • In 2022, it was extended for most NBFCs, excluding government NBFCs.
  • Now, the PCA framework applies to:
    • All Scheduled Commercial Banks except Regional Rural Banks, Payment Banks, and Small Finance Banks.
    • Most NBFCs, including government NBFCs.
  • PCA allows timely supervisory intervention and requires entities to implement remedial measures to restore financial health.

Historical Perspective

  • 2002: RBI Governor Bimal Jalan introduced PCA for Scheduled Commercial Banks, excluding Regional Rural Banks (RRBs).
  • 2018: NABARD implemented a separate PCA framework for RRBs with its own set of regulations.

PCA Classification

  • NBFCs are categorised into Risk Categories 1, 2, or 3 (The higher the number, the higher the risk), based on their capital, loan-asset quality, and other factors.

Corrective Actions (depending on the risk threshold)

  • Banks receiving Strict Warnings.
  • Deeper Audit and supervision.
  • Restrictions on Directors’ Salaries and Dividends.
  • Branch Expansion and Lending Operations Restrictions.
  • Requiring promoters/shareholders to infuse equity and reduce leverage.
  • Mergers or Shutdown: Under the Banking Regulation Act of 1949.


  • Banks in the PCA list can be removed from it by improving their Non-Performing Assets (NPAs), enhancing capital adequacy, and increasing profitability.

Supervisory Action Framework (SAF) for Urban Co-operative Banks

  • The RBI introduced the Supervisory Action Framework for Urban Co-operative Banks in 2012.
  • This framework is similar to the Prompt Corrective Action used for commercial banks.

Regulations Review Authority (RRA 2.0)

  • The RBI established the Regulations Review Authority (RRA 2.0) in 2021 for banks and NBFCs.
  • The purpose of this authority is to streamline RBI rules and regulations.
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