Definition
Prompt Corrective Action (PCA)
Prompt Corrective Action is the RBI framework that imposes restrictions on weak banks breaching thresholds for capital, asset quality or profitability.
When a bank's CRAR, net NPA or ROA crosses risk thresholds, the RBI places it under PCA, restricting lending, branch expansion, dividends and management compensation until it recovers. The aim is to arrest deterioration before the bank fails.
Several weak PSU banks were placed under PCA in the late 2010s and exited after recapitalisation and clean-ups. A revised PCA framework also extended to large NBFCs. PCA status is a strong signal of stress and constrains a bank's ability to grow.
Related terms
- Net NPA RatioThe Net NPA ratio is gross non-performing assets minus provisions held against them, expressed as a percentage of net advances.
- Capital Adequacy Ratio (CAR / CRAR)The Capital Adequacy Ratio, also called CRAR, is the ratio of a bank's capital to its risk-weighted assets, measuring its ability to absorb losses.
- Return on Assets (ROA) for BanksFor a bank, Return on Assets is net profit as a percentage of average total assets, the cleanest cross-comparable measure of how efficiently a bank uses its balance sheet.
- Non-Banking Financial Company (NBFC)An NBFC is an RBI-registered financial company that lends and invests but cannot accept demand deposits or offer cheque facilities like a bank.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.