The Reserve Bank of India has decided to impose additional charges under Prompt Corrective Action Framework on United Bank of India.
In the past, RBI has placed restrictions on seven banks which include Oriental Bank of Commerce, Dena Bank, Central Bank of India, IDBI Bank, Indian Overseas Bank, Bank of Maharashtra and UCO Bank. The RBI has also clarified in the past that banks are placed under PCA to facilitate them to take corrective measures to restore their financial health.
The official notification says
The Reserve Bank of India has prescribed certain additional actions under the Prompt Corrective Action Framework, in view of high net NPA, low coverage ratio and requirement to raise capital, based on the assessment of the Bank's position as on March 31, 2017
Reasons
RBI has taken the decision keeping in view the bank's high net NPA, insufficient CET1 Capital and negative ROA (return on asset) for two consequent years. The decision is based on the Risk-Based Supervision for Commercial Banks
Consequences
Now the bank has to take action that will contribute to the overall improvement in risk management, asset quality, profitability, the efficiency of the bank. RBI can ask the bank to prepare a time-bound plan and commitment for reduction of NPAs; restrict or reduce credit expansion for borrowers below certain rating grades or unrated borrowers, unsecured exposures, loan, the concentration of loans in identified sectors or borrowers.
In April 2017 RBI issued a notification which said
Mandatory action to be taken when a bank breaches the risk threshold includes the restriction on dividend payment, remittance of profits, restriction on branch expansion, higher provisions, restriction on management compensation and director's fees.
The PCA framework would apply without exception to all banks operating in India, including small banks and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators
Other Banks Under PCA
RBI Committee on Risk-Based Supervision for Commercial Banks
On August 3, 2011, a High-Level Steering Committee (HLSC) for Review of Supervisory Processes for Commercial Banks was constituted by the Governor of Reserve Bank of India on August under the chairmanship of Dr K.C. Chakrabarty, Deputy Governor.
The HLSC was mandated to suggest measures for making the supervisory processes for commercial banks more effective and useful to the supervised entities as well.
Major Recommendations of the Committee
- The committee recommended that Risk Based Supervision (RBS) which focusses on evaluating both present and future risks, identifying incipient problems and facilitates prompt intervention/ early corrective action should replace the present compliance-based and transaction-testing approach (CAMELS) which is more in the nature of a point in time assessment. It was recommended that the supervisory action should be based on the Probability of failure of a bank and the likely Impact of its failure on the banking/financial system.
- Elimination any manual intervention was suggested to ensure quality/integrity of data submitted.
- Supervisory rating would be a reflection on the risk elements to determine the overall probability of failure of the bank in light of risks to which the bank is exposed, the strength of control/governance and oversight framework in place and available capital.
- Placing a bank under the Prompt Corrective Action (PCA) framework, if required, would be based on the supervisory rating and the risk-impact score of the bank.
- A single supervisory department should supervise group entities under the jurisdiction of RBI
- There should be a clarity of jurisdiction for the supervised entity and for making the ‘Supervisory Relationship Manager’ an effective single point of contact in the Department of Banking Supervision. The communication between the supervisor and the supervised entity is confidential.
- To ensure the efficient and effective communication between the supervisor and the supervised entity, RBI was directed to form a Supervisory Relationship Manager (SRM) for each bank
- In view of the need to improve skill sets of supervisors in the RBI and creating a knowledge pool of specialists with legal, banking, audit etc. backgrounds, training in specified areas, lateral induction of specialists and a system of continuous movement of people from RBI to external organizations and vice versa may be considered to augment supervisory resources of the RBI.
Risk Threshold Under PCA
The salient features of revised PCA Framework for Banks
1. Capital, asset quality and profitability are the key areas for monitoring in the revised framework.
Indicators to be tracked for Capital, asset quality and profitability would be CRAR/ Common Equity Tier I ratio1, Net NPA ratio2 and Return on Assets respectively.
Leverage would be monitored additionally as part of the PCA framework.
2. The PCA framework would apply without exception to all banks operating in India including small banks and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.
3. A bank will be placed under PCA framework based on the audited Annual Financial Results and the 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
- Breach of ‘Risk Threshold 3’ of CET1 by a bank would identify a bank as a likely candidate for resolution through tools like amalgamation, reconstruction, winding up, etc.
- In the case of a default on the part of a bank in meeting the obligations to its depositors, possible resolution processes may be resorted to without reference to the PCA matrix.
2. The PCA framework would apply without exception to all banks operating in India including small banks and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.
3. A bank will be placed under PCA framework based on the audited Annual Financial Results and the 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
| PCA matrix - Areas, indicators and risk thresholds | ||||
| Indicator | Risk Threshold 1 | Risk Threshold 2 | Risk Threshold 3 | |
| Area | ||||
| Capital (Breach of either CRAR or CET 1 ratio to trigger PCA) |
CRAR- Minimum regulatory prescription for capital to risk assets ratio + applicable capital conservation buffer(CCB) current minimum RBI prescription of 10.25% (9% minimum total capital plus 1.25%* of CCB as on March 31, 2017) And/ Or Regulatory pre-specified trigger of Common Equity Tier 1 (CET 1min) + applicable capital conservation buffer(CCB) current minimum RBI prescription of 6.75% (5.5% plus 1.25%* of CCB as on March 31, 2017) Breach of either CRAR or CET 1ratio to trigger PCA |
upto 250 bps below Indicator <10.25% but >=7.75% upto 162.50 bps below Indicator <6.75% but >= 5.125% |
more than 250 bps but not exceeding 400 bps below Indicator <7.75% but >=6.25% more than 162.50 bps below but not exceeding 312.50 bps below Indicator <5.125% but >=3.625% |
- - In excess of 312.50 bps below Indicator <3.625% |
| Asset Quality | Net Non-performing advances (NNPA) ratio | >=6.0% but <9.0% | >=9.0% but < 12.0% | >=12.0% |
| Profitability | Return on assets (ROA) | Negative ROA for two consecutive years | Negative ROA for three consecutive years | Negative ROA for four consecutive years |
| Leverage | Tier 1 Leverage ratio 4 | <=4.0% but > = 3.5% (leverage is over 25 times the Tier 1 capital) |
< 3.5% (leverage is over 28.6 times the Tier 1 capital) | |
| *CCB would be 1.875% and 2.5% as on March 31, 2018 and March 31, 2019 respectively. | ||||
Mandatory and Discretionary Actions
| Mandatory and discretionary actions | ||
| Specifications | Mandatory actions | Discretionary actions |
| Risk Threshold 1 | Restriction on dividend distribution/remittance of profits. Promoters/owners/parent in the case of foreign banks to bring in capital |
Common menu Special Supervisory Interactions Strategy related Governance-related Capital-related Credit risk related Market risk related HR related Profitability related Operations related Any other |
| Risk Threshold 2 | In addition to mandatory actions of Threshold 1, Restriction on branch expansion; domestic and/or overseas Higher provisions as part of the coverage regime |
|
| Risk Threshold 3 | In addition to mandatory actions of Threshold 1, Restriction on branch expansion; domestic and/or overseas Restriction on management compensation and directors’ fees, as applicable |
|
Expected Questions
Which of the following bank is not under RBI's Prompt Corrective Action w.r.t. December 2017?
a. Oriental Bank of Commerce
b. IDBI Bank
d. Bank of Maharashtra
d. Canara Bank
Who was the head of the High-Level Steering Committee (HLSC) constituted to Review of Supervisory Processes for Commercial Banks by the Governor of Reserve Bank in 2011?
a. Basant Seth
b. Dr K.C. Chakrabarty
c. B. Mahapatra
d. Prof. J R Varma
How many risk thresholds are there in RBI's Prompt Corrective Action Framework?
a. Three
b. Two
c. Four
d. Five
Which of the following is not one of the areas of Prompt Corrective Action Matrix?
a. Capital
b. Leverage
c. Asset Quality
d. None of these
In Risk Threshold 1 of Prompt Corrective Action Framework Net Non-performing advances is
a. >=5.0% but <8.0%
b. >=6.0% but <9.0%
c. >=6.5% but <8.5%
d. >=7% but <9.0%
Under Risk Threshold 3 of Prompt Corrective Action Framework Return on Assets is negative for
a. five consecutive years
b. three consecutive years
c. six consecutive years
d. four consecutive years
