ABSTRACT
This research paper reviews the impact of ‘Prompt Corrective Action Framework of Reserve Bank of India’ on the Corporate Governance of Weak Banks. The PCA Framework envisaged imposition of certain corrective measures at the beginning stage by the RBI in respect of the banks which have become weak on account of erosion in their capital owing to either increase in the level of non performing assets or losses incurred by them. The PCA Framework aims to enable timely supervisory intervention and requires banks to take corrective measures to restore their financial health. The aim is to improve financial health of weak banks and arrest further deterioration. Banks are placed under PCA Framework, when they trigger certain financial parameters related to capital, asset quality, and profitability. The corporate governance impact are (a) restrictions on dividend distribution, branch expansion and management compensation (b) restrictions on certain types of risky lending (c) enhanced monitoring by RBI (d) initiating appropriate measures to manage financial infirmities & risks. The study infers empirically as how all the weak banks which were placed, under PCA Framework, in April 2017, were nursed back to health by (i) augmentation of their capital, (ii) by taking measures to preserve capital and (iii) by providing appropriate level of provisions for losses incurred by them. It has been observed that the corporate governance of all the weak banks, which were placed under PCA Framework of RBI, in 2017, improved considerably, so much so, that all the affected banks have since come out of PCA Framework of RBI.
