Prompt Corrective Action (PCA)
Recently, RBI has come out with revised Prompt Corrective Action (PCA) framework. Provisions of revised PCA Framework will be effective from January 1, 2022.
| Earlier Regime | Revised Regime | |
| Applicability | All Scheduled Commercial Banks (including Small Finance Banks and Payment Banks) | All Scheduled Commercial Banks (excluding Small Finance Banks and Payment Banks) |
| Urban Cooperative Banks Covered? | No. Covered under RBI’s Supervisory Action Framework | No. Covered under RBI’s Supervisory Action Framework. |
| RRBs covered? | No. Covered under NABARD’s Supervisory Action Framework | No. Covered under NABARD’s Supervisory Action Framework |
| Parameters used | Capital to Risk weighted Asset Ratio (CRAR) and Common Equity Tier-1 Ratio.Net Non-Performing Assets (NPA)Leverage ratioReturn on Assets (RoA) | Capital to Risk weighted Asset Ratio (CRAR) and Common Equity Tier-1 Ratio.Net Non-Performing Assets (NPA) andLeverage ratio |
| Return on Assets included? | Yes | No |
| Higher Provisioning Requirements | Mandatory Provision | Discretionary Provision |
| Removal of Bank from PCA Framework | RBI’s discretion | Bank to be taken out of PCA framework if there are no breaches in the parameters for 4 continuous quarters. |
Haircuts
It refers to the difference between the loan amount and actual amount recovered by the Bank from their defaulting customer. Various steel, power, infrastructure, aviation companies etc have defaulted on their loan repayment leading to increase in the NPAs of banking Sector.
Under such circumstances, the Banks usually arrive at a compromise formula where the borrower offers to pay part of loan amount as a one-time settlement. The ‘haircut’ here is the loss made by Bank since the amount paid by the defaulting customer is lower than the actual loan amount.
Co-origination of loans
Co-origination framework seeks to bring the strengths of two sectors i.e.,” banks and micro-finance institutions (MFIs)/non-banking finance companies (NBFCs) together.
Under this framework, both bank and NBFC can come together to provide loans to various sectors wherein they decide to share the loan amount and associated risks in a predetermined manner. It is expected that such a blending would not only increase flow of credit to priority sectors but also bring down the cost of credit for the sector substantially.
Recent Announcement: The Government would speed up co-origination of loans by the Banks and NBFCs.
Sandbox Policy
A regulatory sandbox (RS) generally refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may extend certain regulatory relaxations for the limited purpose of the testing.
RBI’s sandbox policy to develop testing platform to test innovation by the Fintech companies.
As part of this policy, the regulator provides the appropriate regulatory support by relaxing specific legal and regulatory requirements for specified time duration. The idea behind the Sandbox policy is to enable them to test their new products without any regulatory hassles.
Promoter Pledging
It refers to pledging of shares by promoters of a company to avail loans from the Banks. RBI has set a cap on the maximum loan amount that can be availed at 50% of the value of pledged shares.
Inverted Yield Curve
A yield curve is a graph that depicts yields on bonds ranging from short-term debt such as one month to longer-term debt such as 30 years.
Types of Yield Curve & Their Interpretation
The yield on the bonds depends upon the risk involved. Higher the risks, higher would be the yields.
Normal Yield Curve
Normally, the yield on short term maturity bonds is lower than that of long-term maturity bonds. This can be attributed to increased risk in the longer term (say 30 years). A normal yield curve indicates yields on longer-term bonds may continue to rise, responding to periods of economic expansion.
Inverted Yield Curve
When there are signs of slowdown in an economy, it would mean that the economy faces risk in the short term. However, in the long term, the economy may come back to normalcy. Hence, due to this, the yield on the short-term bonds becomes higher than the yields of long-term bonds. (Inverted Yield Curve). Hence, an inverted yield curve points towards a probable economic recession.