RBI unveils PCA framework for urban cooperative banks – Banking and Finance News

The Reserve Bank of India (RBI) on Friday launched a prompt corrective action (PCA) framework for urban cooperative banks (UCBs), on the lines of PCA norms for scheduled commercial banks and non-banking financial companies. The framework will come into effect from April 1, 2025.

The banking regulator places regulated entities under PCA when they fail to meet minimum regulatory requirements regarding capital adequacy ratio (CRAR), non-performing assets (NPA) and profitability. Once placed under PCA, the entity faces severe business restrictions, which are lifted only when it meets the necessary regulatory requirements.

As per the PCA framework, co-operative banks with net NPA ratio of more than 6-12% can be brought under restrictions. UCBs that have posted net losses for two consecutive years can also be brought under the framework. UCBs of all tiers, except Tier I entities with deposits up to Rs 100 crore, which have CRAR lower by 2.5%-4% than the minimum requirement of 9% can be brought under PCA norms.

The regulator has provided a easing path for Tier 2 to Tier 4 cooperative investment banks to achieve the regulatory minimum CRAR of 12% by March 31, 2026.

“A bank will generally be brought under the PCA framework based on its reported/audited annual financial results and/or ongoing supervisory assessment by the RBI. However, the RBI may impose PCA on any bank during the year (including migration from one threshold to another) if circumstances so require,” the regulator said.

If UCB is brought under the PCA regime, it will have to meet minimum regulatory norms regarding CRAR, net NPA and profitability.

Business constraints

Once UCB is brought under the scheme, the RBI will impose strict business restrictions on it, including a ban on raising capital from existing members and issuing shares and other capital instruments.

The RBI will also prohibit UCB from paying dividends to shareholders or making any other donations. Appropriate restrictions will also be imposed on capital expenditure, other than technological upgrades. The RBI may also prohibit UCB from expanding its presence through branches and prohibit it from expanding its total deposit base.

Once UCB Bank is brought under the PCA framework, the RBI will be able to take discretionary actions, including conducting special audits, management checks, personnel checks and revoking its banking licence.