Daily Current Affairs : 30-July-2024

The Reserve Bank of India (RBI) has brought a brand new framework referred to as the Prompt Corrective Action (PCA) for Urban Cooperative Banks (UCBs). This framework is designed to assist improve the monetary health of these banks by allowing short intervention and necessary corrective actions whenever required. It replaces the preceding Supervisory Action Framework (SAF), which was last updated in January 2020.

Key Features of the PCA Framework

The PCA framework is a more flexible system that aims to ensure the stability of UCBs. It is designed to allow tailored interventions based on the specific risks associated with each bank. This new framework shares similarities with the PCA frameworks already used for Scheduled Commercial Banks and Non-Banking Financial Companies (NBFCs).

Main Features of the PCA Framework:

  • Timely Intervention: The framework allows the RBI to step in quickly if a UCB faces financial trouble, helping prevent further deterioration.
  • Individual Risk Assessment: Unlike the previous system, the PCA framework allows for specific actions based on the risk profile of each UCB.
  • Focus on Key Areas: The framework primarily targets three critical areas:
  • Capital Adequacy: Ensuring the bank has sufficient capital to cover its risks.
  • Asset Quality: Monitoring the quality of loans and assets held by the bank.
  • Profitability: Keeping the bank profitable to ensure its sustainability.

Focus on Larger UCBs

The RBI’s PCA framework is particularly focused on larger UCBs. These banks will be closely monitored, and any signs of financial instability will trigger swift regulatory action. However, the framework will not apply to small Tier 1 UCBs, which are generally considered less risky.

Categorization of UCBs

For regulatory purposes, the RBI has divided UCBs into four tiers based on their size and financial health. Larger UCBs are placed under stricter scrutiny, while smaller ones receive relatively relaxed monitoring.

Important Points:

  • Introduction of PCA Framework: The RBI has introduced the Prompt Corrective Action (PCA) framework for Urban Cooperative Banks (UCBs) to improve their financial health.
  • Replaces SAF: The PCA framework replaces the previous Supervisory Action Framework (SAF), last updated in January 2020.
  • Tailored Interventions: The new framework allows for customized interventions based on the specific risk profile of each bank.
  • Key Areas of Focus:
  • Capital Adequacy: Ensuring banks have enough capital to manage risks.
  • Asset Quality: Monitoring the quality of loans and assets.
  • Profitability: Ensuring banks remain profitable and sustainable.
  • Targeted at Larger UCBs: The PCA framework focuses on larger UCBs, which will be subject to intensive monitoring.
  • Exclusion of Small UCBs: The framework does not apply to small Tier 1 UCBs, which are considered less risky.
  • Categorization of UCBs: UCBs are divided into four tiers by the RBI based on size and financial health.
  • Proactive Approach: The PCA framework is designed to allow timely RBI intervention to prevent financial instability and crises in UCBs.
  • Alignment with Other Frameworks: The PCA framework aligns with similar frameworks for Scheduled Commercial Banks (SCBs) and Non-Banking Financial Companies (NBFCs).
  • Improved Supervision: The framework provides more flexible and specific supervision to ensure the long-term health and stability of UCBs.

Why In News

The Reserve Bank of India (RBI) has introduced a Prompt Corrective Action (PCA) framework for Urban Cooperative Banks (UCBs) to strengthen their financial stability and ensure timely corrective measures are taken when required, aiming to prevent potential crises and enhance overall banking health.

MCQs about RBI’s New PCA Framework for Strengthening Urban Cooperative Banks

  1. What is the primary objective of the RBI’s new Prompt Corrective Action (PCA) framework for Urban Cooperative Banks (UCBs)?
    A. To increase the number of UCBs
    B. To prevent financial crises and improve the financial health of UCBs
    C. To eliminate small UCBs
    D. To merge UCBs with scheduled commercial banks
    Correct Answer: B. To prevent financial crises and improve the financial health of UCBs
    Explanation: The PCA framework is designed to help UCBs restore their financial health by allowing the RBI to intervene promptly and take necessary corrective actions to prevent financial crises.
  2. Which of the following areas is NOT a focus of the RBI’s PCA framework for UCBs?
    A. Capital Adequacy
    B. Asset Quality
    C. Profitability
    D. Employee Training
    Correct Answer: D. Employee Training
    Explanation: The PCA framework focuses on three main areas: Capital Adequacy, Asset Quality, and Profitability, but does not directly focus on employee training.
  3. Which type of UCBs will the RBI’s PCA framework specifically target for intensive monitoring?
    A. Small Tier 1 UCBs
    B. Large UCBs
    C. Non-Operational UCBs
    D. Cooperative Banks with foreign ownership
    Correct Answer: B. Large UCBs
    Explanation: The RBI’s PCA framework is designed to focus more closely on larger UCBs, with these banks undergoing more intensive monitoring due to their higher risk profile.
  4. What is the key difference between the new PCA framework and the previous Supervisory Action Framework (SAF)?
    A. The PCA framework applies only to small UCBs
    B. The PCA framework allows for entity-specific action plans based on individual risk assessments
    C. The PCA framework eliminates supervisory intervention
    D. The PCA framework applies only to state-run banks
    Correct Answer: B. The PCA framework allows for entity-specific action plans based on individual risk assessments
    Explanation: Unlike the previous SAF, the PCA framework offers more flexibility by allowing customized supervisory actions based on the individual risk profile of each UCB.

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