RBI introduces PCA framework to improve financial health of UCBs

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Framework will replace the existing Supervisory Action Framework (SAF), and will be effective from April 1, 2025.

The PCA framework has been harmonized with similar frameworks applicable to scheduled commercial banks and non-banking financial companies.

Key features of the framework

Objective: to address the financial health of UCBs with greater precision and flexibility.
Application: to all UCBs in tier 2, tier 3, and tier 4 categories, with the exception of those under All Inclusive Directions (AID).
Capital, Asset Quality and Profitability of UCBs will be the key areas for monitoring.
- A financially unsound and ill-managed UCB can be brought under PCA if it breaches the risk thresholds.
The exit from PCA and withdrawal of Restrictions: if no breaches in risk thresholds in any parameters are observed as per four successive quarterly financial statements.

High gross non-performing assets (GNPA) and dual control.
Lack of professional management and acute market competition with Small Finance Banks (SFBs), FinTechs, etc
Concentrated in few states (mostly in Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu).

Definition: UCBs, though not formally defined, refers to Primary Cooperative Banks located in urban and semi-urban areas.
Duality of Control: Banking related functions (viz. licensing, area of operations, etc.) governed by RBI and registration, management, audit and liquidation, etc. governed by State Governments.
RBI classifies UCBs as:
- Tier-I (deposits up to ₹100 crore)
- Tier-2 (more than ₹100 crore and up to ₹1,000 crore)
- Tier-3 (deposits more than ₹1,000 crore and up to ₹10,000 crore)
- Tier-4 (above ₹10,000 crore)