Economics • Banking & FinanceMedium
What does the term 'Prompt Corrective Action (PCA)' framework for banks specifically trigger when capital or asset quality deteriorates beyond thresholds?
A. Immediate liquidation of the bank's assets by the High Court
B. Mandatory restrictions on dividend distribution, branch expansion, and risky lending✓ Correct Answer
C. Direct bailout funds injection from the Union Budget
D. Nationalization of private foreign banks operating in India
💡 Solution & Explanation
The Prompt Corrective Action framework operates as a supervisory tool deployed by the Reserve Bank of India to intervene early in banks that exhibit high non-performing assets or insufficient capital adequacy ratios. Unlike judicial liquidation or direct budgetary bailouts, PCA imposes regulatory restrictions on dividend payouts, expansion plans, and high-risk lending portfolios. This mechanism is essential for safeguarding depositor interests and preventing systemic financial contagion.
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