The Reserve Bank of India (RBI) has dropped profitability from the list of criteria for putting banks under the prompt corrective framework (PCA) while retaining the other three key parameters.

The revised framework, effective January, will continue to include capital, asset quality and leverage as key areas for monitoring that were introduced in 2017’s framework.

The RBI has also revised the shortfall level in total capital adequacy ratio which would push the bank to ‘risk threshold three’ category. If lenders breach this risk threshold, they will come under the PCA’s most stringent restrictions. 

The RBI has earlier used the PCA whip on 12 weak banks at various stages, imposing business restrictions on them so that they take corrective measures and do not sink. While the RBI recently lifted Indian Overseas Bank and IDBI Bank from the PCA framework, Central Bank of India is still to get out of it. 

For pulling the banks out of the PCA list, the RBI has not followed a uniform policy. Bank of India and Bank of Maharashtra came out of the PCA restrictions in January 2019 after they showed improvement of their net non-performing assets (NPA) ratio by bringing it below their risk threshold of 6%. But they had not become profitable when they were freed from the PCA restrictions. The erstwhile Oriental Bank of Commerce, on the other hand, was profitable but had NPA higher than 6% when it was pulled out of the PCA. 

The RBI has now removed the profitability clause in the revised guidelines. Taking the bank out of PCA framework will be considered if the bank has not breached the risk thresholds in any of the parameters for four continuous quarterly statements, one of which should be audited annual financial statement, the RBI said.

Under the revised rules, the RBI has set up to 50 basis points below the regulatory minimum as risk threshold 1. These weak banks will face restrictions on dividend distribution.

In addition to the restrictions imposed under risk threshold 1, those falling under the second level who have gone down further on capital, asset quality and leverage will also face obstacles on branch expansion.

For those falling under the third risk threshold, the additional restrictions will be on capital expenditure, other than for technological upgradation within board-approved limits.