The mandatory action that would be taken when a bank breaches the risk threshold includes restriction on dividend payment/remittance of profits, restriction on branch expansion, higher provisions, restriction on management compensation and director’s fees
Mumbai : The Reserve Bank of India (RBI) on Thursday said capital, asset quality and profitability would be the basis of the Prompt Corrective Action (PCA) framework on which the banks would be monitored and has defined three kinds of risk thresholds.
In a notification issued by RBI, the mandatory action that would be taken when a bank breaches the risk threshold includes restriction on dividend payment/remittance of profits, restriction on branch expansion, higher provisions, restriction on management compensation and director’s fees. The RBI has classified the risk thresholds into three categories and the PCA depends on the type of risk threshold that was breached. The RBI said the breach of ‘Risk Threshold 3’ of CET1 (common equity tier 1) by a bank would identify a bank as a likely candidate for resolution through tools like amalgamation, reconstruction, winding up and others.
“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,” the RBI said.According to the notification, RBI in its discretion will also advise 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 and others; 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 and undertake restructuring of operations as appropriate.
The banking regulator will also recommend to the bank owner (government/promoters/parent of foreign bank branch) to bring in new management/board).
The RBI may also remove the managerial personnel or supersede the board under the provisions of Banking Regulation Act.
The RBI with regard to capital related actions can also restrict the bank on investment in subsidiaries/associates, restrict expansion of high risk-weighted assets to conserve capital.
With regard to credit risk related action, the RBI can ask the banks to prepare a time bound plan and commitment for reduction of non-performing assets (NPA); restrict or reduce credit expansion for borrowers below certain rating grades or unrated borrowers/unsecured exposures/loan/concentration of loans in identified sectors or borrowers.
