Under the PCA framework, restriction on the distribution of dividends is a mandatory action at which stage?

The correct answer is B, 2014. The Reserve Bank of India issued the D-SIB framework on 22 July 2014, setting out how banks would be picked for the sample, how their systemic importance score would be computed from size, interconnectedness, substitutability and complexity, and how much additional Common Equity Tier 1 capital each bucket would attract. The first names under the framework were disclosed the following year.

Option A, 2011, is the year the Financial Stability Board began publishing the global list of Systemically Important Banks, which is a different exercise carried out at the world level, so it is a classic distractor. Option C, 2017, is the year the earlier Prompt Corrective Action framework for banks was issued, not the D-SIB framework. Option D, 2021, is the year the revised PCA framework was notified. Candidates who mix up these three dates lose an easy mark, so remember 2014 for D-SIBs and 2021 for revised PCA.

The correct answer is B, Leverage. The 2017 framework watched capital, asset quality and profitability, with return on assets as the profitability indicator. The revised framework notified on 2 November 2021 and effective from 1 January 2022 keeps capital and asset quality but drops profitability and brings in leverage, measured by the Tier 1 leverage ratio, as the third core area. This is the single most asked point from the revised framework.

Option A, liquidity, is a prudential concern addressed through the liquidity coverage ratio and the net stable funding ratio, not through PCA parameters. Option C, credit growth, is monitored by the supervisor in other ways but is not a PCA trigger. Option D, provision coverage, is a measure of how much a bank has set aside against bad loans; it is a supervisory expectation rather than a PCA parameter. So the three areas to memorise are capital, asset quality and leverage.

The correct answer is B, Three. The PCA framework arranges breaches into three risk thresholds, each more serious than the last, and attaches mandatory corrective actions to each. Risk Threshold 1 restricts dividend distribution and requires the owners to bring in capital. Risk Threshold 2 adds curbs on branch expansion in India and abroad. Risk Threshold 3 adds limits on capital expenditure, leaving out technology upgrades within board-approved limits.

Option A, two, understates the structure. Option C, four, is a tempting choice because candidates confuse the three thresholds with the four quarterly results needed for exit from PCA. Option D, five, is the number of buckets in the D-SIB framework, not the number of PCA thresholds, so it is the standard cross-topic trap. Keep the pair in mind: five buckets under D-SIB, three thresholds under PCA.

The correct answer is C, State Bank of India. In the 2025 list State Bank of India sits in bucket 4 and must hold an extra Common Equity Tier 1 cushion of 0.80 per cent of its risk weighted assets, over and above the normal minimum and the capital conservation buffer. It is the only bank in a bucket higher than bucket 2, which reflects its size relative to the Indian economy.

Option A, HDFC Bank, is a D-SIB but sits in bucket 2 with a surcharge of 0.40 per cent. Option B, ICICI Bank, is in bucket 1 with the lowest surcharge of 0.20 per cent. Option D, Punjab National Bank, is a large public sector bank but has not been identified as a D-SIB, so it carries no surcharge. Buckets 3 and 5 are empty, which is itself a frequently asked detail.

The correct answer is C, Regional rural banks. The revised framework applies to all scheduled commercial banks but expressly leaves out three categories: small finance banks, payments banks and regional rural banks. Regional rural banks are sponsored by commercial banks and are supervised through a separate arrangement, so they stay outside this framework.

Option A, public sector banks, are squarely covered, and several of them have been placed under PCA in the past. Option B, private sector banks, are also covered, and a private bank can be placed under PCA exactly like a public sector bank. Option D, foreign banks operating through branches in India, are covered too; for them the framework specifically contemplates the parent being asked to bring in capital at Risk Threshold 1. The exclusion list of three is what the question is testing.