Analyze the operational mechanics of the 'Prompt Corrective Action' (PCA) framework enforced by the Reserve Bank of India. Which of the following parameters are monitored to place a commercial bank under PCA restrictions?

💡 Solution & Explanation

The Prompt Corrective Action framework allows the Reserve Bank of India to intervene early and monitor commercial banks that exhibit vulnerability across key financial parameters: Capital to Risk-Weighted Assets Ratio, net non-performing assets, leverage, and profitability. When a bank breaches specified risk thresholds, mandatory and discretionary restrictions are triggered, prohibiting dividend distributions, branch expansions, and risk-weighted asset growth. The framework aims to compel weak institutions to rebuild capital reserves before insolvency threatens depositor funds. A related supervisory mechanism is the Risk-Based Supervision approach adopted by the central bank.