Is RBI's Prompt Corrective Action A Panacea?

Is RBI's Prompt Corrective Action A Panacea?

- Kishore Kumar Biswas

The RBI has been imposing PCA (prompt corrective action) in carrying out banking activities against several Public Sector (PSBs) banks to recover their financial health and improve their book values. As of now there are 11 banks on which restrictions have been imposed. What are the bases of imposition of restrictions on banks? Some of the important characteristics are the amount of NPA (non-performing asset), insufficiency of tier 1 capital, time duration of having negativity of return on assets (ROA), etc. Actually the main criteria are amounts of gross NPA and net NPA less than 10% of the total loan disbursement and CAD being below 8% of the capital. What are the restrictions on such banks?

There are several restrictions on the banks in carrying out banking activities. Some of those are on expenses like opening branches, recruiting staff, enhancement of salaries of the employees. There are other important restrictions on disbursement of loans. After the imposition of PCA, banks have to disburse loans only to those companies whose borrowing is above investment grades.

How far can the imposition of PCA be a panacea for all the selected banks?