Economics • Banking & FinanceHard
A scheduled commercial bank experiences sudden structural liquidity stress, resulting in the erosion of its capital base below the regulatory minimum thresholds. Under the Reserve Bank of India's regulatory architecture, if a bank is placed under the 'Corrective Action' stage involving restrictions on expansion, dividend distribution, and capital restructuring while avoiding immediate closure or liquidation, which institutional framework is being applied, and what is its underlying systemic rationale?
A. The Prompt Corrective Action (PCA) framework, designed to intervene early and monitor financial parameters like capital, asset quality, and profitability to restore financial health without systemic disruption.✓ Correct Answer
B. The Deposit Insurance and Credit Guarantee Corporation (DICGC) resolution mechanism, aimed at reimbursing retail depositors directly up to the insured sum.
C. The Special Liquidity Facility (SLF) mechanism, implemented to infuse temporary cash reserves against corporate bonds.
D. The Asset Quality Review (AQR) mandate, meant exclusively for nationalized banks to write off legacy bad loans in a single fiscal year.
💡 Solution & Explanation
The Prompt Corrective Action framework allows the Reserve Bank of India to intervene early when a scheduled commercial bank breaches vital financial thresholds regarding capital adequacy, asset quality, or leverage, enforcing strict corrective measures without pushing the institution into liquidation. This regulatory mechanism protects depositors and maintains overall systemic stability. PCA thresholds are reviewed periodically based on evolving Basel III norms.
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