April 13, 2017
All Scheduled Commercial Banks
(Excluding Regional Rural Banks)
Madam/ Dear Sir
Revised Prompt Corrective Action (PCA) framework for banks
Please refer to RBI circulars No. DBS.CO.PP.BC.9/11.01.005/2002-03 dated December 21, 2002 and DBS.CO.PP.BC.13/11.01.005/2003-04 dated June 15, 2004 on the scheme of Prompt Corrective Action.
2. The existing PCA framework for banks has since been reviewed and revised. The salient features are provided in the Annex.
3. The provisions of the revised PCA framework will be effective from April 1, 2017 based on the financials of the banks for the year ended March 31, 2017. The framework would be reviewed after three years.
4. The PCA framework does not preclude the Reserve Bank of India from taking any other action as it deems fit in addition to the corrective actions prescribed in the framework.
5. The contents of the circular may be brought to the attention of the bank’s Board of Directors.
(Parvathy V. Sundaram)
Chief General Manager-in-Charge
The salient features of revised PCA framework for banks
A. Capital, asset quality and profitability continue to be the key areas for monitoring in the revised framework.
B. Indicators to be tracked for Capital, asset quality and profitability would be CRAR/ Common Equity Tier I ratio1, Net NPA ratio2 and Return on Assets3respectively.
C. Leverage would be monitored additionally as part of the PCA framework.
D. Breach of any risk threshold (as detailed under) would result in invocation of PCA.
|PCA matrix – Areas, indicators and risk thresholds|
|Indicator||Risk Threshold 1||Risk Threshold 2||Risk Threshold 3|
(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)
current minimum RBI prescription of 6.75% (5.5% plus 1.25%* of CCB as on March 31, 2017)
|upto 250 bps below Indicator
<10.25% but >=7.75%
<6.75% but >= 5.125%
|more than 250 bps but not exceeding 400 bps below Indicator
<7.75% but >=6.25%
|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 ratio4||<=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.|
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.
E. 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.
F. 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.
|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
Special Supervisory Interactions
Credit risk related
Market risk related
|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|
Common menu for selection of discretionary corrective actions
1. Special Supervisory interactions
2. Strategy related actions
RBI to advise the bank’s Board to:
3. Governance related actions
4. Capital related actions
5. Credit risk related actions
6. Market risk related actions
7. HR related actions
8. Profitability related actions
9. Operations related actions
Any other specific action that RBI may deem fit considering specific circumstances of a bank.
1. CET 1 ratio – the percentage of core equity capital, net of regulatory adjustments, to total risk weighted assets as defined in RBI Basel III guidelines
2. NNPA ratio – the percentage of net NPAs to net advances
3. ROA – the percentage of profit after tax to average total assets
4. Tier 1 Leverage ratio – the percentage of the capital measure to the exposure measure as defined in RBI guidelines on leverage ratio.