UNSHACKLING BANKS

On November 2, the Reserve Bank of India (RBI) announced a revised Prompt Corrective Action (PCA) framework for all scheduled banks in India.

- M.G. Arun

The new framework modifies the PCA norms announced in 2017, taking into consideration changes in the banking environment over the past four years. The new norms will be effective January 1, 2022.

The PCA framework is a mechanism that allows the RBI to detect signs of distress in Indian banks and to intervene when necessary. When their financials slide into a suspect zone, as mandated by the PCA framework, the RBI puts in place restrictions on their functioning. Depending on which threshold of risk has been violated, the bank may face restrictions on distributing dividends to shareholders or on branch expansion or even on capital expenditure.

In governance terms, the RBI can even supersede the board of directors of a bank under Section 36ACA of the Banking Regulations Act, 1949.