The Reserve Bank of India (RBI) has revised the Supervisory Action Framework (SAF) for Primary (Urban) Co-operative Banks (UCBs) and introduced the Prompt Corrective Action (PCA) Framework, effective from April 1, 2025. This new framework is applicable to all UCBs under Tier 2, Tier 3, and Tier 4 categories, with Tier 1 UCBs subject to enhanced monitoring but exempt from the PCA Framework for now. This exemption will be reviewed in due course.
The objective of the PCA Framework is to enable timely supervisory intervention and ensure UCBs implement remedial measures promptly to restore their financial health. The framework allows the RBI to take additional corrective actions if deemed necessary. UCBs currently under SAF will continue to follow the restrictions imposed and will be assessed on a case-by-case basis for exit from SAF or placement under PCA.
The PCA Framework focuses on three key areas: Capital, Asset Quality, and Profitability. The indicators tracked include the Capital to Risk-Weighted Assets Ratio (CRAR), Net Non-Performing Assets (NPA) Ratio, and net profit. Breaches in any of these indicators trigger the PCA.
The PCA Matrix outlines parameters, indicators, and risk thresholds:
- Capital: Breach of CRAR, with three risk thresholds.
- Asset Quality: Net NPA Ratio with thresholds at >=6% but <9%, >=9% but <12%, and >=12%.
- Profitability: Incurrence of losses during two consecutive years.
RBI may place a bank under PCA based on reported/audited annual financial results or ongoing supervisory assessments. PCA can be imposed at any time if warranted by circumstances. Supervisory actions can extend beyond those specified if other indicators or governance issues are stressed.
Exit from PCA is considered if there are no breaches in risk thresholds across four continuous quarterly financial statements, one of which must be an audited annual financial statement. RBI will also assess the sustainable improvement in the bank’s key financials.
Corrective actions under PCA are categorized into mandatory and discretionary actions:
- Mandatory actions under Risk Threshold 1 include raising capital, restricting dividend payments, and limiting capital expenditure.
- Discretionary actions include special supervisory meetings, strategy reviews, governance changes, and capital-related actions.
Additional thresholds impose further restrictions, such as on branch expansion and the size of deposits. Other corrective actions span across credit risk, market risk, HR, profitability, operations, and other tailored measures as deemed fit by RBI.
The PCA Framework aims to strengthen the financial stability of UCBs through structured and timely interventions, ensuring that corrective measures are taken before financial stress escalates. This proactive approach is designed to safeguard the interests of depositors and maintain the overall health of the banking sector.
