What is PCA and Why Banks Are Facing PCA?

What is PCA

For more than one year, it has been in the news that some banks are facing PCA. With most common people being unaware of the term, let me explain to you what it is and why some banks face it.

What is PCA?

PCA is an abbreviated form of Prompt Corrective Actions. It is a corrective measure applied by the Central Bank of a country to prevent the commercial banks from financial disaster and bankruptcy.

At present, some banks including 4-5 public banks are under the RBI scanner. The Central Bank of India has decided to include 4-5 public banks into the bracket needing urgent corrective actions. The RBI has already put 11 out of 21 banks on the list.

Why PCA?

An important and obvious question arising in this regard is why the RBI is putting these banks within the PCA framework. The simplest answer is these banks are reportedly not in good financial health. With them showing no symptoms of quick recovery, the RBI has no way but to enforce PCA to bring those back from the brink of complete collapse.

Every commercial bank – whether it is public or private – creates credit from the customers’ deposit. The commercial banks keep a fraction of the total deposit with them to meet the instant demands of the customers and make the rest available for loans. However, if for any reason or the multitude of reasons, a bank runs out of money to survive with stability, prompt corrective measures are considered pertinent for its quick and sustained recovery.

Recent Demand for Wage Hike – Is It in Compliance with PCA?

Any company or banking organization getting finance anemic needs to cut cost and focus on earning more. The PSU bank employees are in favor of wage hike and even called for the nationwide strike for two days in order to push their demand further. Considering what some banks are currently going through, a senior bank official has claimed that such a demand will not favor health restoration measures and will create more problems for the banks.

The ailing banks are not in a position to afford the significant rise in their wage bill and it will negatively affect their condition. As a long-term effect, it will see the acquisition and merging of financially weak banks.

Conclusion

According to the critics and top bank officials, the employees must understand that for the commercial banks, it is hardly possible to think about wages without paying attention to profitability. In other words, the idea of PCA cannot be divorced from wage revision and profitability consideration. The banks should channelize their effort and focus towards boosting lending and earning to get back stability. Doing so will help the public banks retain their customers who might shift to the private banks for loans.

 

 

 

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