Economics • Banking & FinanceMedium
What does the term 'Prompt Corrective Action (PCA)' framework implemented by the RBI entail for weak banks?
A. Immediate nationalization of the bank by the central government
B. Imposition of restrictions on branch expansion, dividend distribution, and risky lending✓ Correct Answer
C. Direct bailout funding using foreign exchange reserves
D. Mandatory merger with non-banking financial companies
💡 Solution & Explanation
The Prompt Corrective Action framework allows the central bank to monitor financial institutions using indicators like capital, asset quality, and profitability, enforcing mandatory operational curbs when these metrics breach specified risk thresholds. Measures like immediate government nationalization or direct foreign exchange bailouts are not standard components of this supervisory mechanism. This framework helps maintain systemic stability in the Indian banking sector by checking reckless credit expansion in vulnerable institutions.
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