Wednesday, July 25, 2018

Project Sashakt: 5 prong strategy on stressed asset resolution

What is Project Sashakt and how it will work

Finance Minister Piyush Goyal unveiled 'Project Sashakt', a five-prong strategy to deal with non-performing assets. Sashakt aims to strengthen the credit capacity, credit culture and credit portfolio of public sector banks.

The Centre accepted Project Sashakt in the first week of July 2018,which is a five-pronged strategy to resolve bad loans, with the larger ones going to an asset management company (AMC) or an Alternative investment fund (AIF)

What is Project Sashakt?

Project Sashakt was proposed by a panel led by PNB chairman Sunil Mehta.  The Five-Prong Approach is as under:-
1. Outlining SME Resolution approach for Bad loans of up to ₹50 crore - which will be managed at the bank level, with a deadline of 90 days.
2. Bank-led Resolution Approach for bad loans between ₹50-500 crore - Under this approach banks will enter an inter-creditor agreement@, authorizing the lead bank to implement a resolution plan in 180 days, or refer the asset to NCLT. 
3. AMC_AIF Resolution Approach for loans above ₹500 crore - The panel recom­mended an independent AMC, supported by institutional funding through the AIF. The idea is to help consolidate stressed assets.
4. NCLT / IBC Resolution Approach &
5. Asset-Trading Platform Approach.

How will the national AMC work?
According to the committee, banks will have to set up an AMC under which there will be multiple sector-specific AIFs. These funds will invest in the stressed assets bought by existing ARCs, such as ARCIL. The ARCs will use the funds to redeem security receipts issued to banks against the bad loans. Other AMC-AIFs and ARCs will be allowed to bid for these assets, and match the pricing offered by ARCIL or the national AMC. The AMC will be responsible for the operational turnaround of the asset.
Who will own the stressed asset?
The ARC after buying the asset from lenders will transfer ownership to the AIF. The new owner, the AMC-AIF, will hold a stake of at least 76%.
What do investors think about the plan?
While investors are optimistic about the AMC-AIF structure, they believe that pricing will be key to complete the transaction. The Mehta panel suggested that the bidding process follow a market-led approach, inviting bids from AMCs, ARCs and AIFs. Existing players, such as ARCIL and the national AMC, will be allowed to set the floor price for the bad assets, while other players will be asked to either match the price or better it.
What is the money involved?
The total quantum of bad loans worth ₹500 crore or more is estimated at ₹3 trillion. According to SBI chairman Rajnish Kumar, the AMC will require funds of ₹1.2 trillion, assuming a 40% loan recovery. Of this, 60-70% is expected to come from domestic institutions and banks, including SBI, and the remaining 30-35% from foreign investors. The AMC will require funding for six to 24 months, said Kumar.

@ Inter-Creditor Agreement:- Banks and financial institutions, including SBI, PNB and LIC entered on 23rd July 2018, into an overarching inter-creditor agreement (ICA) to fast-track resolution of stressed assets of Rs 50 crore or more which are under consortium lending. The ICA is being signed by 22 public sector banks (including India Post Payments Bank), 19 private sector banks and 32 foreign banks. Besides, 12 major financial intermediaries, like LIC, HUDCO, PFC and REC are also signatories to the pact, according to the agreement. 
As many as two dozen lenders signed the inter-creditor agreement (ICA) on Monday the 23rd July 2018, to tackle bad loans between Rs 50-500 crore, adding up to Rs 3.1 lakh crore. Under the agreement, a borrower will be given an opportunity to ‘cure’ the default and a reference for resolution will be made within 30 days of the default, if not repaid.
The agreement, part of the government’s measure to deal with bad loans under Project Sashakt, will be effective by the end of this month. Under the pact each resolution plan will be submitted by the lead lender to an Overseeing Committee. “The lead lender that is the lender with the highest exposure shall be authorized to formulate the resolution plan, which shall be presented to the lenders for their approval." 
Under the ICA framework, the decision making will be by way of approval of ‘majority lenders’, those with 66 per cent share in the aggregate exposure. Once a resolution plan is approved by the majority lenders, it will be binding on all the lenders that are a party to the ICA. Each resolution plan that is formulated in terms of the ICA shall be in compliance with the RBI circular and all other applicable laws and guidelines.

While the agreement will primarily focus on the Rs 50-500 crore category, it can also be used for assets within the Rs 500-2,000 crore range. According to the agreement, the lead bank will be paid a fee for its services. 

एनपीए की समस्या से निपटने हेतु ‘सशक्त’ योजना की घोषणा
सरकार बैंकों के फंसे हुए कर्ज (NPA) की समस्या से निपटने के लिए प्रोजेक्ट सशक्त का ऐलान किया है. इसके तहत पांच सूत्रीय फॉर्मूला पेश किया गया है. सरकार इसे एनपीए से निपटने के लिए लांग ट्रम स्ट्रेटजी बता रही है. सरकार एनपीए की समस्या से निपटने के लिए बैड बैंक नहीं बनाने जा रही है लेकिन वह इसके लिए असेट मैनेजमेंट कंपनियों और स्टीयरिंग कमेटियों का गठन करेगी.
देश के सरकारी बैंकों के एनपीए अर्थात् नॉन परफॉरमिंग एसेट्स की समस्या को दूर करने के लिए एक समग्र नीति लागू किये जाने की घोषणा की गई है. यह समग्र नीति ‘प्रोजेक्ट सशक्त’ के नाम से लागू होगी जिसे सुनील मेहता की अध्यक्षता में गठित समिति की रिपोर्ट के आधार पर तैयार किया गया है.

'सशक्त' योजना के तहत पांच सूत्री फॉर्मूला लागू किया जाएगा. वित्त मंत्री पीयूष गोयल ने कहा कि देश में करोड़ रुपये से ज्यादा राशि के 200 बैंक खाते हैं. इनमें तकरीबन तीन लाख करोड़ रुपये के कर्ज फंसे हैं.

प्रोजेक्ट योजना सम्बंधित प्रमुख तथ्य

•    पचास करोड़ रुपये तक के फंसे कर्ज खातों के निपटारे के लिए हर बैंक में एक संचालन समिति का गठन किया जाएगा. इसका फायदा छोटी व मझोली कंपनियों को सबसे ज्यादा होगा कि उन पर ही 50 करोड़ रुपये तक का एनपीए है.

•    समिति 90 दिनों के भीतर इन सभी खातों के बारे में फैसला करेगी कि इन्हें और ज्यादा कर्ज देने की जरुरत है या इनके खाते को बंद करने की जरुरत है.

•    50 से 500 करोड़ रुपये तक के एनपीए खाता के लिए यह फैसला किया गया है कि उनके बारे में लीड बैंक की अगुवाई में फंसे कर्जे के निपटारे का फैसला किया जाएगा.

•    इस श्रेणी के खाताधारकों को एक से अधिक बैंक कर्ज देते हैं इसलिए एक कर्ज देने वाले बैंकों के बीच एक समझौता किया जायेगा.

•    500 करोड़ रुपये से ज्यादा राशि के अन्य एनपीए खाते जिनका निपटारा एएमसी के जरिए भी नहीं हो सकेगा उन्हें दिवालिया कानून के तहत ही सुलझाया जाएगा.

•    इसे लागू करने के लिए इन बैंकों की एक स्क्रीनिंग समिति भी गठित होगी जो यह देखेगी कि तय नियमों का पालन पारदर्शी तरीके से किया जा रहा है या नहीं.
सुनील मेहता समिति का गठन
जून 2018 में वित्त मंत्री पीयूष गोयल ने पंजाब नेशनल बैंक की अगुवाई में समिति का गठन किया गया जिसकी अध्यक्षता सुनील मेहता को सौंपी गई. इस समिति को बैड बैंकजैसी संरचना की व्यावहारिकता परखने एवं दो सप्ताह में संपत्ति पुनर्निर्माण कम्पनी के गठन के लिए सिफारिश देने के लिए कहा गया.
इस समिति में स्टेट बैंक ऑफ़ इंडिया के चेयरमैन रजनीश कुमार, बैंक ऑफ़ बड़ोदा के प्रबंध निदेशक एवं मुख्य कार्यकारी अधिकारी पी एस जयकुमार तथा एसबीआई के उप प्रबंध निदेशक सी वेंकट नागेश्वर शामिल थे.

इस योजना का लाभ यह होगा कि इन ग्राहकों से ऋण वसूलने का झंझट बैंकों पर नहीं रहेगा. गोयल ने बताया कि एएमसी पूरी तरह से बाजार आधारित होंगे और देश में एक से ज्यादा एएमसी का गठन हो सकता है. इसमें देसी-विदेशी कंपनियां भी शामिल हो सकती हैं. यह प्रावधान किया जा रहा है कि एएमसी 60 दिनों के भीतर एनपीए का निपटारा करेंगे.

स्ट्रेस्ड एसेट से निपटने के लिए करीब दो दर्जन कर्ज देने वाली संस्‍थाओं ने एक समझौता किया है। इस समझौते में शामिल ज्‍यादातर सरकारी बैंक हैं। इन सभी के बीच में इंटर क्रेडिटर्स एग्रीमेंट (ICA) पर हस्‍ताक्षर हुए। इस समझौते के बाद 500 करोड़ रुपए तक के स्ट्रेस्ड एसेट का जल्‍द निपटान किया जा सकेगा।

सशक्‍त प्रोजेक्‍ट का हिस्‍सा है यह समझौता
यह समझौता सशक्‍त प्रोजेक्‍ट का हिस्‍सा है। पीएनबी के पूर्व चेयरमैन सुनील मेहता की अध्‍यक्षता में एक कमेटी बनी थी, जिसकी सिफारिशों के आधार पर यह योजना बनाई गई थी। इस कमेटी ने जुलाई की शुरुआत में अपनी रिपोर्ट सौंपी थी। इस कमेटी में अन्‍य दो सदस्‍यों में SBI के प्रमुख रजनीश कुमार और बैंक ऑफ बड़ौदा के प्रमुख पीएस जयाकुमार शामिल थे।

-इस समझौते के बाद बैंक और अन्‍य वित्‍तीय संस्‍थानों के बीच एक प्‍लेटफार्म तैयार हो जाएगा जो NPA में फंसे पैसों की वसूली में मदद करेगा। इस वक्‍त बैंक और वित्‍तीय संस्‍थानों का करीब 12 फीसदी पैसा बैड लोन के रूप में है। इस समझौते की मदद से बैंक अपने 50 से 500 करोड़ रुपए तक के फंसे हुए लोन की वसूली तेजी से कर सकेंगे।

ज्‍यादा बैंक ले चुके हैं बोर्ड से अनुमति
मेहता के अनुसार इंटर क्रेडिटर्स एग्रीमेंट हो चुका है। ज्‍यादातर बैंकों ने अपने बोर्ड से इसकी अनुमति ले ली है और जो बाकी हैं वह यह प्रोसेस तेजी से पूरा कर रहे हैं। इस कदम का उद्देश्‍य फंसे हुए कर्ज की वसूली तेज करना है। उनके अनुसार आज यह ए्ग्रीमेंट 18 सरकारी बैंकों, तीन निजी क्षेत्र के बैंक सहित एग्जिम बैंक ने इस पर साइन किया है। उनके अनुसार अभी कई बैंक और वित्‍तीय संस्‍थान इस समझौते पर साइन करेंगे। यह संस्‍थान अपने बोर्ड से इस सबंध में अप्रूवल लेने की तैयारी में है।

जुलाई के अंत तक इस पर शुरू हो जाएगा काम
उन्‍होंने कहा कि जुलाई के अंत यह समझौता आपरेशनल हो जाएगा। उन्‍होंने आशा जताई कि जल्‍द ही सभी बैंक इसका हिस्‍सा बन जाएंगे। मेहता के अनुसार इस समझौते पर विदेशी बैंकों ने अभी साइन नहीं किया है। इसके लिए उन्‍हें अपने बोर्ड से अप्रूवल लेना होगा।

बैंकों का फंसा है काफी पैसा
मार्च 2018 तक बैंकों का 50 से लेकर 500 करोड़ रुपए का बैड लोन करीब 3.10 लाख करोड़ रुपए का है। वहीं 50 करोड़ रुपए से कम के लोन में बैंकों का करीब 2.10 लाख करोड़ रुपए फंसा हुआ है।

 Dainik Bhaskar dt. 24th July 2018

Source: Financial Express, Business Standard, Live Mint & Economic Times, Jagran Josh, Nai Dunia Jagran, Dainik Bhaskar

Tuesday, January 9, 2018

Electoral Bond Scheme

Electoral Bonds as instruments alternative to cash Donations made to Political parties

The Finance Ministry has come out with the scheme "Electoral Bonds Scheme" with a view to cleanse the Election Funding.

The Finance Minister Shri Arun Jaitly has announced on January 2nd the details of Electoral Bond Scheme.

The electoral bonds, which are being pitched as an alternative to cash donations made to political parties, will be available at specified branches of State Bank of India (SBI) for 10 days each in months of January, April, July and October 18. The bonds, which would be valid for 15 days, will not carry the donor’s name even though the purchaser would have to fulfil KYC norms at the bank. The new electoral bonds donors can buy from SBI and receiving political parties can encash only through a designated bank account.
The Electoral Bond Scheme is proposed as a Electoral reform because of the following:
  • The move is aimed at making political funding more transparent.
  • The bonds will be bearer bonds and the identity of the donor will not be known to the receiver.
  • The Bonds will substantially cleanse the Political funding System as Clean Money through banking System would be channelised in the system. “Electoral bonds will ensure clean money and significant transparency against the current system of unclean money.”
  • Moving away from Cash -The Electoral Bonds which will be Bearer Instruments being issued in different denominations ranging from Rs.1000 to Rs. 1 crore can be encashed only through a designated Bank just removing the Cash Element.
What is an Electoral Bond?

Electoral Bond is a financial instrument for making donations to political parties. These are issued by Scheduled Commercial banks upon authorisation from the Central Government to intending donors, but only against cheque and digital payments (it cannot be purchased by paying cash). These bonds shall be redeemable in the designated account of a registered political party within the prescribed time limit from issuance of bond.
Electoral bond was announced in the Union Budget 2017-18. Required amendments to the Reserve Bank of India Act, 1934 (Section 31(3)) and the Representation of People Act, 1951 were made through Section 133 to 136 of Finance Bill, 2017.  
(For Details of Amendments please click on the following link: Amendments to the Reserve Bank of India Act, 1934-Section 133 to 136 of Finance Bill, 2017.)
Characteristic of Electoral Bonds:
  • Electoral bonds will be issued by a notified bank for specified denominations of Rs. 1000,              Rs 10000, Rs.  1 Lakh, Rs. 10 lakh and /or Rs 1 Crore.
  • The Donor willing to donate to a political party, can buy these bonds by making payments digitally or through cheque. The Donor's are then free to gift the bond to a registered political party. 
  • The Donors would have to make KYC (know your customer) disclosures to the SBI. “A citizen of India or a body incorporated in India will be eligible to purchase the bond,” he said.
  • The electoral bond is more like a bail-bond than a Government or corporate bond. 
  • The bonds will likely be bearer bonds and the identity of the donor will not be known to the receiver. Electoral bonds are essentially like bearer cheques. 
  • The issuing bank will remain in the custodian of the donor’s funds until the political party redeems the bond. 
  • The Political Party can can convert these bonds back into money via their bank accounts. The bank account used must be the one notified to the Election Commission.
  • The bonds may have to be redeemed within a prescribed time period of 15 days, during which it can be used for making donation only to registered political parties,
  • The Electoral bonds will prompt donors to take the banking route to donate, with their identity captured by the issuing authority.

Objective of Electoral Bond Scheme

Introduction of electoral bonds specifically aims at killing the black money that funds political parties in India. Most political parties use the sloppy/lax regime on donations to accept cash donations from anonymous sources.
  • Nearly 70% of the Rs.11,300 crore plus in party funding over an 11-year duration came from unfamiliar sources, as per the opinion of Association for Democratic Reforms.
  • Currently, political parties are required to report any donation of over Rs.20,000 to the IT Department. But there is practice of more endowments coming by way of hard cash in smaller amounts.
  • To fix this, the Union Budget has reduced the disclosure limit to Rs.2, 000 and insists that any amount over this must be paid through cheque or the digital mode. The concept  is that electoral bonds will be carried out by donors to take the banking route to donate, with their identity captured by the issuing authority.
  • Under Section 31 of the RBI Act of 1934, the bearer instruments can be issued only by the Central government or the RBI. The change in the RBI Act will empower the designated authorized banks also to issue the bearer instruments. The government will decide which banks to authorize and other modalities after discussion with RBI.
        Improved Transparency
        The Finance Minister Shri Arun Jaitly  while announcing the details of  Electoral bonds said 
  • “Donors  who buy these bonds, their balance sheet will reflect. It will ensure cleaner money coming from  donors, cleaner money coming to political party and ensure significant transparency”.                 
  • He said at present, donor, quantum and source of funds is not known.
  • “The donor will know which party  he is depositing money. The political party will file return with the Election Commission.  Now, which  donor gave to which political party, that is the only thing which will not  be     known,”
  • “Electoral bonds will ensure clean money and significant transparency against the current system of unclean money.”      

 Contrary to the perception that the curbs on political funding proposed by the Finance                     Minister    in the Union Budget would improve transparency, political organizations funding is         likely to become largely vivid in the coming years.
  • Section 29C of the Representation of People Act (RP Act-1951) for which BJP led NDA regime claims  credit during the Vajpayee era  needs all recognized National and State level political parties to make annual declarations of contributions received from companies, institutions and individuals in excess of Rs.20,000.
  • The EC publicises the contribution reports of recognized National and State level political parties on its website as and when it receives them.

      The Finance Bill 2017 had proposed that the contributions accepted through “electoral bond”          needs to be excluded from the preview of sub-section (3) of section 29C of the said Act. 
  • The Income Tax Act is also sought to be amended to exclude donations received by these political organization  via electoral bonds  reported to the IT Department each year in order for them to continue to avail the exemption from submitting income tax.
  • In other words, political parties will not be required to disclose the identity of individuals and organizations who make donations through electoral bonds bought from the commercial banks.
  • Thus, if approved by Parliament, the combined effect of the amendments to the IT Act and the RP Act is likely to be as follows:


(1) Many political parties are likely to strive to accept cash endowments below Rs. 2,000 only, these will not be required to be reported to the Income Tax Department and  or to the EC India.
(2) As donations received through electoral bonds are exempt from being included in the annual reports of political parties to the IT Department or the Election Commission of India, these amounts will also not be reported.
(3) Only such contributions received above Rs. 20,000 through cheques or digital mode of payment will be required to be reported to the IT Department and the Election Commission of India.
In  the year 1987, the  then regime launched  a  bond called Indira Vikas Patra, which  issued through Post offices. Since this had the essence of a bearer bond, it conferred secrecy to the holders of this bond. However, it was finally  not continued after it was doubted that these bonds were used as a conduit for laundering black money.
But there are loopholes to electoral bonds too. While the identity of the donor is captured, it is not revealed to the party or public. So transparency is not enhanced for the voter.
Source: Indian Economic Service, Business Line, Ministry of Finance, RBI,

Wednesday, May 3, 2017

Guidelines on Merchant Acquisition for Card Transactions

RBI has permitted Cooperative Banks to issue both offsite and onsite ATM's and issue Debit cards on their own or through their Sponsored Banks upon meeting certain eligibility criterion set up by RBI.

RBI has also permitted all the Cooperative Banks to enter into credit card business on their own or through Co Branded agency arrangement with other Banks. For this too they have to meet certain eligibility criterion. In view of the need for promoting digital transaction in the Cooperative Banks RBI has laid down the following Criteria:

1. All co-operative banks not intending to act as Point of Sale (POS) acquiring bank are permitted to deploy third party POS terminals without prior approval of Reserve Bank of India (RBI) subject to the bank fulfilling the following criteria:
  1. The co-operative bank should be licensed by RBI and CBS compliant;
  2. The bank’s CRAR should not be less than 9% in the preceding financial year;
  3. The bank should have made a net profit in the preceding financial year;
  4. The bank’s board should consist of at least two professional directors;
  5. A customer grievance redressal mechanism duly approved by the bank’s board should be in place;
  6. The bank should have a board approved policy on merchant acquisition for card transactions;
  7. There should not be any restrictions imposed on the bank for accepting deposits/withdrawals by Reserve Bank of India.
  8. The bank should obtain consent of their merchant customers before offering third party POS terminals and disclose the process of settlement.
  9. The bank should report to respective Regional Offices of RBI within a month with necessary documents after the operationalization of third party POS terminals.
2. All co-operative banks intending to act as POS acquiring bank are permitted to deploy their own POS terminals with prior approval of RBI subject to the bank fulfilling the following criteria:
  1. The co-operative bank should comply with criteria mentioned above at 1(a) to (g) of Para 1. The bank’s IT systems & CBS should have been subjected to an IS Audit not earlier than six months from the date of application to confirm that the system is adequately secure.
  2. Assessed net-worth should be more than ₹ 25 crore as per the last RBI inspection;
  3. Gross NPAs should be less than 7% and net NPAs should be less than 3% in the preceding financial year;
  4. No monetary penalty should have been imposed in last two financial years and during the year of submitting the application;
  5. There should not be any default in the maintenance of CRR/SLR during the preceding financial year;
  6. The bank should be a member of authorized card network, such as RuPay, Visa, MasterCard etc.
3. The banks shall comply with instructions and guidelines on Merchant Acquisition for card transactions and POS issued by Department of Payment and Settlement Systems, RBI from time to time.
4. The co-operative banks desirous to deploy their own POS terminals and act as POS acquiring bank may approach the respective Regional Offices of RBI for necessary permission in this regard, with requisite information/documents.

Friday, April 21, 2017

Liquidity and its Management by RBI

With Rs 4.8 trillion of excess funds flooding the system, the RBI  shifted its policy focus to liquidity management by raising reverse repo rate by 25 bps and slashing MSF by an equal measure. In its First Bi-Monthly Monetary Policy on 6th April 2017 RBI stressed upon the "Liquidity Management". 

                 The central bank also promised to have a more effective liquidity management tool in a new instrument called a Standing deposit facility (SDF) at the earliest. 

                  It is therefore essential for a common man to know what is meant by Liquidity Management. It is our endeavour to make common man understand about Liquidity and Liquidity Management.

             Liquidity: Liquidity Means available cash in the economic system, be it neutral, deficient or surplus. Availability of the higher amount of cash in the system leads to lowering/softening of the interest rates, whereas deficiency of cash may lead to higher interest rates even without the RBI intervention.  Similarly availability of the liquidity in the system influences RBI policy action either through increase or reduction in the policy rates.
           RBI's Apprehensions : The banking system had excess cash. In March, the average liquidity was about Rs 4.81 lakh crore, which was conducive to lower overnight rates. In fact, inter-bank call money rate dipped about 65 bps lower than the policy or repo rate at 6.25%. This was clearly not in RBI's comfort zone and could well upset its policy stance. RBI likes to have overnight rates within 15-25 bps range over the policy rate. The central bank changed its policy stance to `'neutral'' from “accommodative“. A neutral stance is contrary to surging liquidity in the system.

                 Reasons for Excessive Liquidity: The Government's move of demonitisation by banning Rs 500 and Rs 1000 SBN's wef 8th Nov 2016 has flooded the economic system with cash and high Bank deposits. Now with the remonitisation the situation has started coming to normalcy.

         RBI's Tools for Sucking Excess Liquidity from the system:  With the remonitisation drive of the Government after 31st December 2016 and RBI to print new Currencies and the removal of cash withdrawal limits the excess cash from the system is being withdrawn. This is yielding positive results in addition to the traditional tools such as Open market operations, Cash Management Bills (CMB) and reverse repo auctions.

          Impact of Narrowing of LAF Corridor by increasing Reverse Repo rate: By increasing the reverse repo rate the RBI has curbed volatility. This will help short term rates to increase thereby bringing them in line with the policy rates. We expect the short term bonds to outperform long term bonds. Short term bonds are less sensitive to the policy outlook as well as to global risks. In the past few days the policy move has yielded positive results in raising overnight rates.

              Liquidity vs Inflation: Since the Economic System which is having excess liquidity is prone to Inflationary tendency. Since RBI's prime objective is to control Inflation RBI focuses on the Management of Liquidity in the system. RBI Governor Mr. Urjit Patel said liquidity management has become important now to contain inflation 

Source: Economic Times, Business Line

Thursday, April 13, 2017

Revised Prompt Corrective Action (PCA) framework for banks

Reserve Bank of India vide its notification no.RBI/2016-17/276 / DBS.CO.PPD. BC.No.8/11.01.005/2016-17 dated 1th April 2017 has revised existing Prompt Corrective Action (PCA) framework for banks which will come into effect from April 1, 2017 based on the Financials of the Bank for March 31st 2017.
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.
RBI Clarification on Banks under Prompt Corrective Action

The Reserve Bank has emphasized that the PCA framework has been in operation since December 2002 and the guidelines issued on April 13, 2017 is only a revised version of the earlier framework.

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
IndicatorRisk Threshold 1Risk Threshold 2Risk Threshold 3
(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

Asset QualityNet Non-performing advances (NNPA) ratio>=6.0% but <9.0%>=9.0% but < 12.0%>=12.0%
ProfitabilityReturn on assets (ROA)Negative ROA for two consecutive yearsNegative ROA for three consecutive yearsNegative ROA for four consecutive years
LeverageTier 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.
  1. 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.
  2. 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
SpecificationsMandatory actionsDiscretionary 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.
RBI Clarification on Banks under Prompt Corrective Action 
Date : Jun 05, 2017
The Reserve Bank of India has come across some misinformed communication circulating in some section of media including social media, about the Prompt Corrective Action (PCA) framework.
The Reserve Bank has clarified that the PCA framework is not intended to constrain normal operations of the banks for the general public.
It is further clarified that the Reserve Bank, under its supervisory framework, uses various measures/tools to maintain sound financial health of banks. PCA framework is one of such supervisory tools, which involves monitoring of certain performance indicators of the banks as an early warning exercise and is initiated once such thresholds as relating to capital, asset quality etc. are breached. Its objective is to facilitate the banks to take corrective measures including those prescribed by the Reserve Bank, in a timely manner, in order to restore their financial health. The framework also provides an opportunity to the Reserve Bank to pay focussed attention on such banks by engaging with the management more closely in those areas. The PCA framework is, thus, intended to encourage banks to eschew certain riskier activities and focus on conserving capital so that their balance sheets can become stronger.
The Reserve Bank has emphasized that the PCA framework has been in operation since December 2002 and the guidelines issued on April 13, 2017 is only a revised version of the earlier framework.

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.