Economics • Banking & FinanceMedium
What is the main objective of the 'Prompt Corrective Action (PCA)' framework applied to commercial banks by the RBI?
A. To monitor banks showing signs of financial stress, particularly regarding capital adequacy, asset quality, and profitability, and initiate timely corrective measures.✓ Correct Answer
B. To penalize banks for charging high interest rates on agricultural loans.
C. To privatize weak public sector banks through rapid equity dilution.
D. To bail out insolvent non-banking financial companies using sovereign funds.
💡 Solution & Explanation
The Prompt Corrective Action framework enables supervisory intervention by the Reserve Bank of India when a bank breaches risk thresholds on parameters like Capital to Risk-Weighted Assets Ratio, net non-performing assets, and return on assets. Other choices involving the direct bailout of non-banking financial institutions or penalizing agricultural credit are incorrect because this mechanism focuses strictly on depository commercial banks showing balance sheet stress. A related regulatory tool is the prompt resolution framework for systemically important non-banking financial companies.
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