How the RBI steps in before a weak bank fails — and how a business qualifies as an MSME.
The RBI's Prompt Corrective Action (PCA) framework is a supervisory tool that places restrictions on a bank once its financial health deteriorates past specified thresholds — tracked via three key indicators: capital adequacy ratio, net non-performing assets (NPAs), and return on assets. Once a bank breaches a threshold, it is placed under PCA, facing restrictions on branch expansion, dividend distribution, and lending to certain segments — aimed at early corrective action before the bank's health deteriorates to the point of failure, rather than punitive action.
Micro, Small and Medium Enterprises are classified based on investment in plant & machinery/equipment and annual turnover — a composite criterion introduced in the 2020 revision, replacing the earlier system that used investment alone and treated manufacturing and service enterprises differently. The 2020 revision raised the investment and turnover thresholds substantially, allowing more enterprises to access MSME benefits (collateral-free loans, priority sector lending, government procurement preferences) without losing that status as they grow — addressing the earlier disincentive for small businesses to expand.
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