PCA Shall Apply To UCBs Under Tier 2, Tier 3, Tier 4 From April 2025

RBI issues Prompt Corrective Action (PCA) Framework for Primary (Urban) Co-operative Banks: The revised framework is expected to give more focus on the larger UCBs requiring more intensive monitoring by optimal utilisation of supervisory resources.

FinTech BizNews Service

Mumbai, July 27, 2024: The Reserve Bank of India on Friday issued a Prompt Corrective Action (PCA) Framework for Primary (Urban) Co-operative Banks (UCBs). The provisions of the PCA Framework will be effective from April 1, 2025.

Background

The Reserve Bank had issued a Supervisory Action Framework (SAF) as an early intervention tool for bringing about desired improvements in weak UCBs and UCBs which are experiencing financial stress. The SAF was last revised vide RBI Circular dated January 6, 20201. This PCA framework shall replace the SAF.

The salient features of the PCA Framework are as follows:

• The framework has been suitably harmonised with similar frameworks applicable for Scheduled Commercial Banks and Non-Banking Financial Companies, with suitable modifications keeping in mind the underlying principle of proportionality.
• The PCA framework is largely principle-based with fewer number of parameters as compared to the SAF, without any dilution in the supervisory rigour.
• The revised framework seeks to provide flexibility to design entity specific supervisory action plans based on the assessment of risks on a case-by-case basis.
• The hard-coded limit of Rs 25,000/- for restrictions on capital expenditure by UCBs under SAF has been dispensed with.  The revised framework enables the Supervisors to decide the limit depending upon their assessment of each entity.
• The PCA Framework has been made applicable to all UCBs in Tier 2, Tier 3 and Tier 4, except UCBs under All Inclusive Directions (AID).
• Tier 1 UCBs have been excluded from the PCA framework for the present. However, they shall continue to be subjected to enhanced monitoring under the extant supervisory framework.
• The revised framework is expected to give more focus on the larger UCBs requiring more intensive monitoring by optimal utilisation of supervisory resources.

PCA Framework for Primary (Urban) Co-operative Banks

A. Capital, Asset Quality and Profitability will be the key areas for monitoring in the revised PCA Framework.

B. Indicators to be tracked for Capital, Asset Quality and Profitability would be CRAR, Net NPA Ratio (percentage of net NPA to net advances) and net profit, respectively.

C. The PCA Framework would apply to all Primary (Urban) Co-operative Banks (UCBs) in Tier 2, Tier 3 and Tier 4, based on breach of risk thresholds of identified indicators.

D. Breach of any risk threshold (as detailed under) may result in invocation of PCA.

E. A bank will generally be placed under PCA Framework based on the Reported/Audited Annual Financial Results and/or the ongoing Supervisory Assessment made by RBI. However, RBI may impose PCA on any bank during the course of a year (including migration from one threshold to another) in case the circumstances so warrant. Although supervisory action taken will primarily be based on the criteria specified under the PCA Framework, the Reserve Bank will not be precluded from taking appropriate supervisory action in case stress is noticed in other important indicators/parameters or in case of serious governance issues. Also, the Reserve Bank will not be precluded from taking any supervisory action other than those indicated in this circular, based on the merits of each case.

F. Exit from PCA and Withdrawal of Restrictions under PCA - Once a bank is placed under PCA, taking the bank out of PCA Framework and/or withdrawal of restrictions imposed under the PCA Framework will be considered: a) if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements, one of which should be Audited Annual Financial Statement (subject to assessment by RBI); and b) based on supervisory comfort of the RBI, including an assessment on sustainable improvement in key financials of the bank.

G. When a bank is placed under PCA, one or more of the following corrective actions may be prescribed:

Common menu for selection of discretionary corrective actions

1. Special Supervisory actions

1. Special Supervisory Monitoring Meetings at quarterly or other identified frequency
2. Special inspections/targeted scrutiny of the bank
3. Cause a special and/or additional audit of the bank under the extant supervisory mechanism and/or through external auditors
4. Resolution of the bank by Amalgamation or Reconstruction (Ref.: Section 45 of Banking Regulation Act 1949)

2. Strategy related actions

RBI to advise the bank’s Board to:

1. Activate the Action Plan that has been duly approved by the supervisor
2. Review the progress under the Action Plan on quarterly/monthly basis and submit the post-review progress report to RBI
3. Undertake a detailed review of business model in terms of its sustainability, profitability of business lines and activities, medium and long-term viability, etc.
4. Review short term strategy focusing on addressing immediate concerns
5. Review medium term business plans, identify achievable targets and set concrete milestones for progress and achievement
6. Undertake business process reengineering as appropriate
7. Undertake restructuring of operations as appropriate
8. Restriction on expansion of size of the balance sheet
9. Explore merger option if steps taken by it do not appear to be yielding the desired results; seeking a Board-approved proposal for merging the UCB with another bank or converting itself into a credit society

3. Governance related actions

1. RBI to actively engage with the bank’s Board on various aspects as considered appropriate
2. RBI to remove managerial persons under relevant provisions of the BR Act 1949 as applicable
3. RBI to supersede the Board under Section 36AAA of the BR Act 1949 (AACS)
4. RBI to appoint Additional Directors on the Board under relevant provisions of the BR Act 1949 as applicable
5. RBI to impose other restrictions or conditions permissible under the BR Act, 1949

4. Capital related actions

1. Detailed Board level review of capital planning - UCB to submit a Board-approved Action Plan for increasing CRAR to minimum regulatory requirement or above within 12 months
2. Submission of plans and proposals for raising additional capital
3. Requiring the bank to bolster reserves through retained profits
4. Restriction on investment in non-core business activities/ concerns
5. Restriction in expansion of high risk-weighted assets to conserve capital
6. Reduction in exposure to high risk sectors to conserve capital
7. Restrictions on increasing stake in non-core business activities/ concerns

5. Credit risk related actions

1. Preparation of time-bound plan and commitment for reduction of stock of NPAs - UCB to submit a Board-approved Action Plan for reducing its Net NPAs below the Risk Threshold 1
2. Preparation of and commitment to plan for containing generation of fresh NPAs
3. Higher provisions for NPAs/ NPIs and as part of the coverage regime
4. Strengthening of loan review mechanism
5. Restrictions/ reduction in total credit risk weight density (e.g. restriction/ reduction in credit for borrowers below certain rating grades, restriction on fresh loans and advances carrying risk-weights more than 100% and/or beyond the specified limit, restriction/ reduction in unsecured exposures, etc.)
6. Reduction in loan concentrations in identified sectors, industries or borrowers; Curtailment of sanction/ renewal of credit facilities to sectors/ segments having high proportion of NPAs/ defaults
7. Reduction in exposure limits for fresh loans and advances
8. Sale of non-banking assets
9. Reduction in high risk-bearing assets
10. Avoiding renewal of limits for defaulting borrowers
11. Action plan for recovery of assets through identification of areas (geography-wise, industry segment-wise, borrower-wise, etc.) and setting up of dedicated Recovery Task Forces, Adalats, etc.
12. Prohibition on expansion of credit/ investment portfolios other than investment in government securities/ other High-Quality Liquid Investments

6. Liquidity / Market risk related actions

1. Restrictions on dealings/ reduction in borrowings from the inter-bank market
2. Restrictions on accessing/ renewing wholesale deposits/ costly deposits
3. Prohibition on expansion of size of the deposits
4. Improving liquid assets to short term liabilities ratio

7. HR related actions

1. Restriction on staff expansion
2. Review of specialized training needs of existing staff

8. Profitability related actions

1. Appropriate restrictions on capital expenditure
2. Restrictions/ reduction in variable operating costs

9. Operations related actions

1. Measures for reduction in interest and operating/ administrative expenses
2. Restrictions on branch expansion plans
3. Reduction in non-core business activities
4. Restrictions on entering into new lines of business
5. Reduction in leverage through reduction in non-fund-based business
6. Reduction in risky assets
7. Restrictions on non-credit asset creation
8. Restrictions in undertaking businesses as specified
9. Restriction/ reduction of outsourcing activities
10. Restrictions on new borrowings
11. Identifying and closure of loss making/ non-remunerative/ unviable businesses
12. Restrictions on entering specified business/ new line of business/ branch expansion
13. Rationalise branches, closing down or merging loss-making branches to the extent feasible

10. Other actions

1. Any other specific action that RBI may deem fit considering specific circumstances of a bank.