International Research Journal of Commerce , Arts and Science

 ( Online- ISSN 2319 - 9202 )     New DOI : 10.32804/CASIRJ

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PROMPT CORRECTIVE ACTION: A CRUCIAL COMPONENT OF CREDIT PERFORMANCE OF BANKS

    1 Author(s):  VINIT VARMA

Vol -  10, Issue- 7 ,         Page(s) : 68 - 75  (2019 ) DOI : https://doi.org/10.32804/CASIRJ

Abstract

The Reserve Bank of India (RBI) tightened the Prompt Corrective Action (PCA) norms when bad loans situation in the country got worse, with many PSU banks showing high NPA ratio. The RBI, so far, had put 11 PSBs under PCA with different degree of restrictions. These 11 banks were IDBI Bank, Indian Overseas Bank, Bank of Maharashtra, United Bank of India, Dena Bank, Corporation Bank, UCO Bank, Central Bank of India, Oriental Bank of Commerce and Bank of India. Rating agencies like Fitch have hailed the RBI’s decision to put stricter norms, saying that it would address the problems of struggling banks. However, the government is of the opinion that the RBI should relax the PCA norms so that banks get to lend more amid the liquidity crunch in NBFCs following the crisis at Infrastructure Leasing and Financial Services (IL&FS). As the name suggests, Prompt Corrective Action is a quick corrective measure taken in case a bank is found to be having low Capital Adequacy Ratio (CAR) or high NPAs. RBI initiates PCA when CAR goes below 9% or NPA rises above 10%. When RBI initiates PCA against a bank, it puts restrictions on fresh loans and dividend distribution. The actions could include stricter norms for lending, branch expansion, and management change and asset reduction depending on the financial health of the bank. In this paper researcher tried to understand current move of RBI in relaxing banks from PCA norms.

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