Viral V Acharya: Prompt Corrective Action - an essential element of Financial Stability Framework

Remarks by Dr Viral V Acharya, Deputy Governor of the Reserve Bank of India, at the Indian Institute of Technology, Mumbai, 12 October 2018.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Abstract

This talk explains why the Prompt Corrective Action (PCA) framework of the Reserve Bank of India (RBI) is an essential element of its financial stability framework. It lays out the case for structured early intervention and resolution by regulators for banks that become under-capitalised due to poor asset quality or vulnerable due to loss of profitability. Detailing the mandatory and discretionary actions under the RBI's Revised PCA framework, it compares and contrasts these with the PCA framework operating in the United States. Finally, it documents empirically how Indian banks under the PCA framework are being restored back to health through better capitalisation, preservation of capital, and provisioning for losses.

I would like to thank the Indian Institute of Technology (IIT), Bombay, and in particular, Professor Pushpa Trivedi, who inspired me to pursue Economics and Finance, for inviting me back to IIT, my undergraduate alma mater. It is always an occasion of great pride and immense satisfaction for me to return to the Powai campus and be reminded of what I learnt here - the importance of identifying big problems to solve, approaching them with an analytical mindset, scything through seemingly attractive but incomplete fixes, and in the process, discovering durable solutions that address the root causes underlying the problems.