Prompt Corrective Action Plan are the RBI suggested measures that should be a taken by banks when certain financial indicators like capital adequacy ratio and NPAs goes worsen beyond a level.
RBI has issued a policy action guideline (first in December 2002, later in 2014 and last revised effective from April 1, 2017) in the form of Prompt Corrective Action (PCA) Framework if a commercial bank’s financial condition worsens below a mark. The PCA framework specifies the trigger points or the level in which the RBI will intervene with corrective action. This trigger points are expressed in terms of parameters for the banks.
The parameters that invite corrective action from the central bank are:
1. Capital to Risk Weighted Asset Ratio (CRAR)
2. Net Non-Performing Assets (NPA) and
3. Return on Assets (RoA)
4. Leverage ratio
When these parameters reach the set trigger points for a bank (like CRAR of 9%, 6%, 3%), the RBI will initiate certain structured and discretionary actions for the bank. As per the revised framework by the RBI, in April 2017, capital, asset quality and profitability continue to be the key areas for monitoring. Along with this, leverage of banks also will be monitored.
