- PCA framework is a supervisory tool used by RBI.
- It specifies regulatory trigger points for banks.
- These triggers are based on three parameters:
- Capital (Capital Adequacy Ratio).
- Asset Quality (NPA).
- Leverage (equity capital/total assets).
- Once a bank hits a threshold, RBI initiates structured and discretionary actions.
- It ensures banking discipline by forcing banks to take corrective measures.
- It encourages banks to avoid riskier activities and conserve capital.
- This strengthens their balance sheets.