Module: | MODULE B: RISK MANAGEMENT
Q332: Scenario: During a Risk-Based Supervision (RBS) cycle, the regulator discovers that a commercial bank's Common Equity Tier 1 (CET1) capital has plummeted below the prescribed minimum thresholds due to a massive surge in Non-Performing Assets. Consider the following statements regarding the regulatory intersection with the Prompt Corrective Action (PCA) framework:
1. The regulator will immediately initiate the Prompt Corrective Action framework, placing operational restrictions on the bank to preserve capital.
2. Under the PCA framework, the bank is strictly prohibited from paying dividends to shareholders and may face restrictions on domestic branch expansion.
3. The ultimate objective of invoking the PCA framework is to immediately and permanently liquidate the bank to protect the financial system.
Which of the statements given above is/are correct?
2. Under the PCA framework, the bank is strictly prohibited from paying dividends to shareholders and may face restrictions on domestic branch expansion.
3. The ultimate objective of invoking the PCA framework is to immediately and permanently liquidate the bank to protect the financial system.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The Prompt Corrective Action (PCA) framework is directly triggered when a bank breaches critical regulatory thresholds, specifically related to Capital (CET1/CRAR dropping below minimums), Asset Quality (high Net NPAs), and Leverage.
The regulator intervenes to prevent further deterioration.
Statement 2 is correct: Once a bank is placed under the PCA framework, mandatory restrictions kick in.
To conserve capital, the bank is strictly prohibited from distributing dividends.
Depending on the risk threshold crossed, it may also face harsh restrictions on branch expansion, capital expenditure, and management compensation.
Statement 3 is incorrect: The objective of PCA is not immediate liquidation or closure.
The stated goal of the RBI's PCA framework is to intervene early, facilitate prompt corrective actions by the bank's management, and restore the financial health of the institution, ensuring it returns to normal operations while protecting depositor interests.
The regulator intervenes to prevent further deterioration.
Statement 2 is correct: Once a bank is placed under the PCA framework, mandatory restrictions kick in.
To conserve capital, the bank is strictly prohibited from distributing dividends.
Depending on the risk threshold crossed, it may also face harsh restrictions on branch expansion, capital expenditure, and management compensation.
Statement 3 is incorrect: The objective of PCA is not immediate liquidation or closure.
The stated goal of the RBI's PCA framework is to intervene early, facilitate prompt corrective actions by the bank's management, and restore the financial health of the institution, ensuring it returns to normal operations while protecting depositor interests.