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With reference to the revised Prompt Corrective Action (PCA) framework of the Reserve Bank of India that will be applicable from January 2022, consider the following statements:
- The PCA excludes Small Finance Banks and Payment Banks from its purview.
- Banks will be evaluated on Return on Assets and Leverage Ratio.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
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Most Upvoted Answer
With reference to the revised Prompt Corrective Action (PCA) framework...
Understanding the Revised PCA Framework
The Prompt Corrective Action (PCA) framework is a critical mechanism established by the Reserve Bank of India (RBI) to ensure the financial health of banks. The revised PCA framework, effective from January 2022, includes modifications in its scope and evaluation criteria.
Statement Analysis
1. Exclusion of Small Finance Banks and Payment Banks
- The first statement correctly states that the PCA framework excludes Small Finance Banks (SFBs) and Payment Banks from its purview. This decision was made to encourage the growth of these types of banks, which primarily serve the underserved segments of the population.
2. Evaluation Criteria
- The second statement claims that banks will be evaluated based on Return on Assets (RoA) and Leverage Ratio. However, the revised PCA framework does not specifically use RoA as a criterion. Instead, it focuses on parameters like Capital to Risk Weighted Assets Ratio (CRAR), Net Non-Performing Assets (NNPA), and Return on Equity (RoE), among others. Therefore, this statement is incorrect.
Conclusion
Given the analysis of both statements:
- Correct Statement: The PCA framework does exclude Small Finance Banks and Payment Banks.
- Incorrect Statement: Banks will not be evaluated on Return on Assets.
Thus, the correct answer is option 'A': only the first statement is accurate.
The Prompt Corrective Action (PCA) framework is a critical mechanism established by the Reserve Bank of India (RBI) to ensure the financial health of banks. The revised PCA framework, effective from January 2022, includes modifications in its scope and evaluation criteria.
Statement Analysis
1. Exclusion of Small Finance Banks and Payment Banks
- The first statement correctly states that the PCA framework excludes Small Finance Banks (SFBs) and Payment Banks from its purview. This decision was made to encourage the growth of these types of banks, which primarily serve the underserved segments of the population.
2. Evaluation Criteria
- The second statement claims that banks will be evaluated based on Return on Assets (RoA) and Leverage Ratio. However, the revised PCA framework does not specifically use RoA as a criterion. Instead, it focuses on parameters like Capital to Risk Weighted Assets Ratio (CRAR), Net Non-Performing Assets (NNPA), and Return on Equity (RoE), among others. Therefore, this statement is incorrect.
Conclusion
Given the analysis of both statements:
- Correct Statement: The PCA framework does exclude Small Finance Banks and Payment Banks.
- Incorrect Statement: Banks will not be evaluated on Return on Assets.
Thus, the correct answer is option 'A': only the first statement is accurate.
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Community Answer
With reference to the revised Prompt Corrective Action (PCA) framework...
- The RBI recently issued a notification revising norms for commercial banks to be placed under the regulator’s Prompt Corrective Action (PCA) framework should any of their key metrics fall out of line. The revision will take effect from January 1, 2022.
- The objective of the PCA framework is to enable supervisory intervention at the appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner so as to restore its financial health.
- As per the revised PCA norms issued in 2017, banks were to be evaluated on capital, asset quality, profitability and leverage.
- The capital adequacy ratio governs the capital that a bank ought to hold as a percentage of its total assets. The adequacy measure includes buffers such as the capital conservation buffer (2.5%), which may be used to shore up capital in good times, but which may be relaxed to encourage further lending during economic crises.
- Asset quality tells us what portion of the loans is unlikely to be paid back, reflected in the net nonperforming asset ratio that is the portion of total advances tagged non-performing, after the provisioning for bad loans.
- Return on assets (RoA) measures profitability, derived from net income (profit) as a percentage of total assets.
- The leverage ratio shows how much a lender has stretched itself in borrowing funds to generate income. The more the leverage, the riskier the turf on which the lender stands.
- • The 2021 notification has removed return on assets as an indicator to qualify for PCA. Hence statement 2 is not correct.
- Further, the 2017 notification applied to scheduled commercial banks but excluded Regional Rural Banks from its purview, while the 2021 version excludes Small Finance Banks and Payment Banks too. Hence statement 1 is correct.
- In the latest set of rules, the RBI has clearly spelt out that exit from the PCA would be based on four continuous quarterly results, with one being Audited Annual Financial Statement as per the new framework apart from Supervisory Comfort of RBI, assessment on sustainability of profitability.
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With reference to the revised Prompt Corrective Action (PCA) framework of the Reserve Bank of India that will be applicable from January 2022, consider the following statements: The PCA excludes Small Finance Banks and Payment Banks from its purview. Banks will be evaluated on Return on Assets and Leverage Ratio.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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With reference to the revised Prompt Corrective Action (PCA) framework of the Reserve Bank of India that will be applicable from January 2022, consider the following statements: The PCA excludes Small Finance Banks and Payment Banks from its purview. Banks will be evaluated on Return on Assets and Leverage Ratio.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about With reference to the revised Prompt Corrective Action (PCA) framework of the Reserve Bank of India that will be applicable from January 2022, consider the following statements: The PCA excludes Small Finance Banks and Payment Banks from its purview. Banks will be evaluated on Return on Assets and Leverage Ratio.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for With reference to the revised Prompt Corrective Action (PCA) framework of the Reserve Bank of India that will be applicable from January 2022, consider the following statements: The PCA excludes Small Finance Banks and Payment Banks from its purview. Banks will be evaluated on Return on Assets and Leverage Ratio.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?.
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