When does RBI Invoke Prompt Corrective Action (PCA) on commercial banks ?

RBI takes into account four factors to determine whether it needs to put a bank under the Prompt Corrective Action (PCA) framework. These include profitability, asset quality, capital ratios and debt level. The central bank grades each of these factors based on actions depending upon the grade / threshold level, categorised from one to three, where 1 is the lowest of the lot and 3 being the highest based on how banks stand with respective frameworks. Following is a look at these Factors and their Grades: Capital Adequacy Ratio (CRAR): The CRAR is basically the capital needed for a bank measured in terms of assets (mostly loans) disbursed by the banks. The higher the assets, the higher should be the capital retained by the bank. This measures how much debt and equity capital banks possess to cover their asset book risk. If CRAR is less than 10.25%, but above 7.75%, the bank falls in the first grade. Banks having a CRAR of over 6.25%, but below 7.75%, fall under grade 2. However, if a bank's capital adequacy ratio is less than 3.625%, it is categorised under grade 3. Asset Quality: This parameter refers to the non-performing assets of a bank. If the net NPA of a bank is more than 6%, but less than 9%, it falls under the first threshold. If Net NPA crosses the 9% mark, it triggers the second grade. That said, if this metric is 12% or more, the bank will fall in the third grade of PCA. Profitability: The regulator considers the return on assets (ROA) of a bank as the key measure for profitability. Note that if a bank's ROA is negative for two, three and four years in a row, it will be categorised as grade 1, grade 2 and grade 3, respectively. Debt Level/Leverage: The last factor that RBI considers to measure the financial risk of any bank is its overall debt level/leverage. The regulator triggers grade 1 if the overall leverage of a bank is more than 25 times its Tier 1 capital. However, when total leverage is over 28.5 times its core capital (including disclosed reserves), RBI takes action according to grade 2 of PCA.