Prompt Corrective Action:
In order to improve the performance of banks that have been identified to be weak and restore their operational efficiency, the RBI introduced the new Prompt Corrective Action (PCA) format with built-in rectification measures, effective from financial year (FY) 2018–19.
The PCA measures the performance of banks using various parameters and classifies them into three risk thresholds.
Each level denotes a degree of weakness ranging from risk threshold I (less risky) to risk threshold III (very risky).
Among others, PCA measures three key parameters:
- asset quality,
- net non-performing assets (NNPAs), and
- capital adequacy ratio.
NNPAs breaching the 6% level or capital adequacy ratio getting close to the minimum threshold of 10.25% would be clear indicators of weakness.
It also tracks concurrent negative rate of return on assets (ROA) ranging from two to four consecutive years.
This results in banks posting losses after turning RoA negative.
Based on such metrics, the RBI has imposed PCA on 11 out of 21 PSBs so far.
The guidance of the central bank and the reprioritisation of their business activities may hasten their revival. Such remedial measures, already imposed by the RBI, can be a good starting point for the new BBB to understand the operational state of PSBs.
Many more PSBs may become subject to RBI surveillance under PCA when the operational results of FY 2018–19 are finalised and made public.
The PCA also clearly specified the consequences of the three risk thresholds and the action needed at each stage. So, a forward vision can be articulated depending on the progress in reviving PSBs.
The remaining PSBs can test their performance parameters and improve on them in time to avert the imposition of PCA.