In News
- Scheme of amalgamation of Lakshmi Vilas Bank with DBS Bank India Ltd approved giving benefits to about 20 Lakh account holders
Background
- LVB was placed under the prompt corrective action (PCA) framework in September 2019 considering the breach of PCA thresholds as on 31st March, 2019.
- The RBI has specified certain regulatory trigger points, as a part of prompt corrective action (PCA) Framework, in terms of three parameters, i.e. capital to risk weighted assets ratio (CRAR), net non-performing assets (NPA) and Return on Assets (RoA), for initiation of certain structured and discretionary actions in respect of banks hitting such trigger points.
- After taking into consideration various developments, the RBI had come to the conclusion that in the absence of a credible revival plan, with a view to protect depositors’ interest and in the interest of financial and banking stability, there is no alternative but to apply to the Central Government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949.
Benefits
- This will protect about 20 Lakh depositors’ interest and will give financial stability to the Bank. LVB had been under moratorium for a period of 30 days
- LVB will be amalgamated with DBIL from the appointed date and with this there will no further restrictions on withdrawal
- There will not be any job risk for about 4,000 employees who will be retained as per previous terms and conditions
Prompt corrective action (PCA) framework
What is PCA?
-
- PCA norms allow the regulator to place certain restrictions such as halting branch expansion and stopping dividend payment.
- It can even cap a bank’s lending limit to one entity or sector.
- Other corrective actions that can be imposed on banks include special audit, restructuring operations and activation of recovery plan.
- Banks’ promoters can be asked to bring in new management, too. T
- The RBI can also supersede the bank’s board, under PCA.
When is PCA invoked?
- The PCA is invoked when certain risk thresholds are breached.
- There are three risk thresholds which are based on certain levels of asset quality, profitability, capital and the like.
The third such threshold, which is maximum tolerance limit, sets net NPA at over 12% and negative return on assets for four consecutive years.
What will a bank do if PCA is triggered?
- Banks are not allowed to renew or access costly deposits or take steps to increase their fee-based income.
- Banks will also have to launch a special drive to reduce the stock of NPAs and contain generation of fresh NPAs.
- They will also not be allowed to enter into new lines of business. RBI will also impose restrictions on the bank on borrowings from the interbank market.
What are the types of restrictions?
- There are two types of restrictions, mandatory and discretionary.
Mandatory restrictions on dividend, branch expansion, directors compensation, while discretionary restrictions could include curbs on lending and deposit.
Source:
THE HINDU
