Effects of the revised PCA framework: A case study on the recent development in Public Sector Banks in India

Abstract

This year marks the ten year anniversary of the Lehman Brothers crash, the starting point of the Global Financial Crisis. The crisis forced countries all over the world to develop and reorganize their regulations for their financial markets. One country, which banks still suffers from high NonPerforming Assets (NPAs) and weak performance, is India. This paper investigates India’s revised Prompt Corrective Action Framework, that was developed to break recent rise in NPAs by looking at the short- and long-term effects of the framework. The paper also looks at similarities and dissimilarities of the banks that are currently under PCA restrictions, to draw further conclusions. The paper finds no clear evidence that the revised PCA Framework has been able to stop credit deterioration among Public Sector Banks (PSBs) in the short-term. In addition, the paper discusses the implications of the PCA Framework not being ownership neutral, e.g. not including exceptions with regards to PSBs. These exceptions specifically limit the Reserve Bank of India’s mandate to take action against the management and governance of PSBs under the PCA Framework. As poor governance in PSBs is identified as a root cause of the rising NPAs, these exceptions severely hampers the PCA Frameworks’ usefulness in stifling the current situation.