Economics • Banking & FinanceHard
Analyze the functioning of the 'Prompt Corrective Action' framework for scheduled commercial banks in India. When is a bank placed under this regulatory restriction?
A. When key financial parameters such as capital adequacy ratio, net non-performing assets, and leverage ratios breach prescribed risk thresholds.✓ Correct Answer
B. When a bank fails to open rural branches in remote hilly districts within one year of licensing.
C. When foreign exchange trading volumes exceed domestic retail deposit liabilities.
D. When quarterly net profits decline for two consecutive reporting periods due to administrative expenses.
💡 Solution & Explanation
The Prompt Corrective Action framework enables the Reserve Bank of India to intervene early and take supervisory remedial measures against scheduled commercial banks that breach critical financial thresholds concerning capital adequacy, asset quality measured by net non-performing assets, and profitability or leverage. Restrictions under this framework include prohibitions on dividend distribution, curbs on branch expansion, limitations on capital expenditure, and restrictions on risky lending operations. This supervisory tool aims to restore financial health and prevent bank failures before they necessitate costly government bailouts or resolutions.
More Economics Banking & Finance questions
- In the context of Indian banking, what does the term 'Priority Sector Lending (PSL)' entail?
- What is the primary objective of the Repo Rate maintained by the Reserve Bank of India?
- What is the primary objective of the 'Prompt Corrective Action (PCA)' framework administered by the Reserve…
- What does the term 'Marginal Standing Facility' denote in the monetary operations managed by the Reserve Bank…
- Examine the capital adequacy guidelines under the Basel III framework. What specific category of capital…