In a revolutionary move to strengthen the resilience of Bangladesh's banking sector, recently the Bangladesh Bank issued Circular No. 17 on December 05, 2023, introducing the Prompt Corrective Action (PCA) Framework for commercial banks.
This initiative signifies a pivotal step by the central bank, emphasizing its commitment to ensuring the financial stability of commercial banks operating within the country.
The PCA Framework, detailed in the circular, is designed to identify and address early issues in banks, preventing adverse impacts on the national economy. The corrective actions are based on critical financial ratios, including CRAR, Tier 1, CET1 ratios, Net NPL, and considerations of Corporate Governance.
Effective from March 31, 2025, and based on annual audited financials ending December 31, 2024, the operationalization of the PCA Framework rests on audited financial statements and supervisory assessments.
Md Touhidul Alam Khan, FCMA, Additional Managing Director & Chief Credit Officer of Premier Bank opined, “The introduction of Bangladesh Bank's PCA Framework is viewed by financial analysts as a crucial step towards banking sector stability. The framework's reliance on key ratios and governance metrics provides a clear roadmap for addressing early issues. Analysts anticipate its impact on market dynamics and investor confidence.”
Banks are required to inform their boards in the next meeting, and the PCA Framework is subject to periodic review. The framework categorizes banks into Categories 1-4 based on predefined criteria, with Bangladesh Bank informing the bank, determining the worst category, and placing it under PCA. A Directive Issuance (DOBB) follows with corrective actions within a specified timeframe, and the bank's board guarantees compliance and commits to corrective measures.
If a bank achieves normal conditions, the PCA obligation is lifted. Banks must submit periodic progress reports, and the Bangladesh Bank may conduct special inspections and audits to verify compliance. Non-compliance may result in penal measures, mergers, or special measures under the Banking Companies Act, 1991.
“From an economic policy perspective, the PCA Framework showcases adaptability by considering additional actions under existing laws. Consequences for non-compliance underscore the commitment to regulatory standards. Ongoing communication between regulators and banks is emphasized for navigating evolving challenges”, Touhidul Alam added.
The categorization matrix is based on CRAR, Tier 1, CET1 ratios, Net NPL, and considers the duration of categories based on parameter persistence. Additional parameters, including liquidity, corporate governance, and risk management, are considered, and failure to maintain liquidity ratios or non-compliance may invoke the PCA Framework.
