What is Prompt Corrective Action Framework?
- Prompt Corrective Action or PCA is a framework under which banks with weak financial metrics are put under watch by the RBI. The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital ratios, asset quality and profitability.
- It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios. Banks with a capital to risk-weighted assets ratio (CRAR) of less than 10.25 per cent but more than 7.75 per cent fall under threshold 1 and those with CRAR of more than 6.25 per cent but less than 7.75 per cent fall in the second threshold.
- 11 state-run banks and one private lender are under the PCA framework, which prevents them from riskier lending and expanding branches, among other curbs, until they recover.
Why is there a proposal for relaxation?
- The request to relax PCA norms comes at a time when growth is slowing and non-banking financial companies (NBFCs) are constrained by lack of liquidity. Since loans from NBFCs contribute almost 17% of the total credit off-take and one-third of retail credit, the crisis will hit loan growth. Since public sector banks, that have 70% of the market share have capital constraints they are unable to fill the space vacated by NBFCs.
- A parliamentary committee had also recommended reviewing the PCA framework, “It is not clear as to how these banks will turn around their operations with the existing curbs on lending and even deposit-taking in the case of some,” the committee observed in a report, adding this could trigger a vicious cycle in the banking sector and the economy at large.
What is the extent and effect of the NPA problem in India?
- Banks give loans and advances to borrowers. Based on the performance of the loan, it may be categorised as: (i) a standard asset (a loan where the borrower is making regular repayments), or (ii) a non-performing asset. NPAs are loans and advances where the borrower has stopped making interest or principal repayments for over 90 days.
- As of 2018, the total NPAs in the economy stand at Rs 9.6 lakh crore. About 88% of these NPAs are from loans and advances of public sector banks. Banks are required to lend a certain percentage of their loans to priority sectors. These sectors are identified by the RBI and include agriculture, housing, education and small-scale industries. In 2018, of the total NPAs, 22% were from priority sector loans, and 78% were from non-priority sector loans.
- In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017 which indicates that an increasing proportion of a bank’s assets have ceased to generate income for the bank, lowering the bank’s profitability and its ability to grant further credit.