RBI/2016-17/276
DBS.CO.PPD. BC.No.8/11.01.005/2016-17
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.
Yours faithfully
(Parvathy V. Sundaram)
Chief General Manager-in-Charge
Annex
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
|
Area
|
|
|
|
|
Capital
(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)
And/ Or
Regulatory pre-specified trigger of Common Equity Tier 1 (CET 1min) +
applicable capital conservation buffer(CCB)
current minimum RBI
prescription of 6.75% (5.5% plus 1.25%* of CCB as on March 31, 2017)
Breach of either CRAR
or CET 1 ratio to trigger PCA
|
upto 250 bps below Indicator
<10.25% but >=7.75%
upto 162.50 bps below Indicator
<6.75% but >= 5.125%
|
more than 250 bps but not
exceeding 400 bps below Indicator
<7.75% but >=6.25%
more than 162.50 bps below but not exceeding 312.50 bps below Indicator
<5.125% but >=3.625%
|
-
-
In excess of 312.50 bps below Indicator
<3.625%
|
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.
|
i.
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.
ii.
In the
case of a default on the part of a bank in meeting the obligations to its
depositors, possible resolution processes may be resorted to without
reference to the PCA matrix.
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
|
Common
menu
Special Supervisory
Interactions
Strategy related
Governance related
Capital related
Credit risk related
Market risk related
HR related
Profitability related
Operations related
Any other
|
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
·
Special
Supervisory Monitoring Meetings (SSMMs) at quarterly or other identified
frequency
·
Special
inspections/targeted scrutiny of the bank
·
Special
audit of the bank
2. Strategy related actions
RBI to advise the bank’s Board
to:
·
Activate
the Recovery Plan that has been duly approved by the supervisor
·
Undertake
a detailed review of business model in terms of sustainability of the
business model, profitability of business lines and activities, medium and
long term viability, balance sheet projections, etc.
·
Review
short term strategy focusing on addressing immediate concerns
·
Review
medium term business plans, identify achievable targets and set concrete
milestones for progress and achievement
·
Review
all business lines to identify scope for enhancement/ contraction
·
Undertake
business process reengineering as appropriate
·
Undertake
restructuring of operations as appropriate
3. Governance related actions
·
RBI to
actively engage with the bank’s Board on various aspects as considered
appropriate
·
RBI to
recommend to owners (Government/ promoters/ parent of foreign bank branch)
to bring in new management/ Board
·
RBI to
remove managerial persons under Section 36AA of the BR Act 1949 as
applicable
·
RBI to
supersede the Board under Section 36ACA of the BR Act 1949/ recommend
supersession of the Board as applicable
·
RBI to
require bank to invoke claw back and malus clauses and other actions as
available in regulatory guidelines, and impose other restrictions or
conditions permissible under the BR Act, 1949
·
Impose
restrictions on directors’ or management compensation, as applicable.
4. Capital related actions
·
Detailed
Board level review of capital planning
·
Submission
of plans and proposals for raising additional capital
·
Requiring
the bank to bolster reserves through retained profits
·
Restriction
on investment in subsidiaries/associates
·
Restriction
in expansion of high risk-weighted assets to conserve capital
·
Reduction
in exposure to high risk sectors to conserve capital
·
Restrictions
on increasing stake in subsidiaries and other group companies
5. Credit risk related actions
·
Preparation
of time bound plan and commitment for reduction of stock of NPAs
·
Preparation
of and commitment to plan for containing generation of fresh NPAs
·
Strengthening
of loan review mechanism
·
Restrictions
on/ reduction in credit expansion for borrowers below certain rating grades
·
Reduction
in risk assets
·
Restrictions
on/ reduction in credit expansion to unrated borrowers
·
Reduction
in unsecured exposures
·
Reduction
in loan concentrations; in identified sectors, industries or borrowers
·
Sale
of assets
·
Action
plan for recovery of assets through identification of areas (geography
wise, industry segment wise, borrower wise, etc.) and setting up of
dedicated Recovery Task Forces, Adalats, etc.
6. Market risk related actions
·
Restrictions
on/reduction in borrowings from the inter-bank market
·
Restrictions
on accessing/ renewing wholesale deposits/ costly deposits/ certificates of
deposits
·
Restrictions
on derivative activities, derivatives that permit collateral substitution
·
Restriction
on excess maintenance of collateral held that could contractually be called
any time by the counterparty
7. HR related actions
·
Restriction
on staff expansion
·
Review
of specialized training needs of existing staff
8. Profitability related actions
·
Restrictions
on capital expenditure, other than for technological upgradation within
Board approved limits
9. Operations related actions
·
Restrictions
on branch expansion plans; domestic or overseas
·
Reduction
in business at overseas branches/ subsidiaries/ in other entities
·
Restrictions
on entering into new lines of business
·
Reduction
in leverage through reduction in non-fund based business
·
Reduction
in risky assets
·
Restrictions
on non-credit asset creation
·
Restrictions
in undertaking businesses as specified.
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.
|