Reserve Bank Issues Prompt Corrective Action Framework For NBFCs

The PCA framework for the NBFCs will come into effect from October 1, 2022

The Reserve Bank of India

New Delhi: The Reserve Bank of India (RBI) on Tuesday issued prompt corrective action (PCA) framework for non-banking finance companies (NBFCs).

The central bank has issued PCA framework for Scheduled Commercial Banks in 2002 and the same has been reviewed from time to time, based on the experience gained and developments in the banking system. It may be recalled that the revised PCA framework for Scheduled Commercial Banks (SCBs) was issued on November 2, 2021.

According to a statement issued by the RBI, the objective of the PCA framework is to enable supervisory intervention at appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner, so as to restore its financial health.

The PCA framework is also intended to act as a tool for effective market discipline. The PCA framework does not preclude the Reserve Bank of India from taking any other action as it deems fit at any time in addition to the corrective actions prescribed in the framework, the statement reads.

The PCA framework for the NBFCs will come into effect from October 1, 2022. This framework will be applicable for all the NBFCs that sit in the middle, upper, and top layers of the RBI’s scale-based regulations. Therefore, the small NBFCs would be excluded from such tight regulatory purview of the central bank.

The PCA framework is applicable to the following category of NBFCs:

All Deposit Taking NBFCs [Excluding Government Companies].

All Non-Deposit Taking NBFCs in Middle, Upper and Top Layers.

[Including Investment and Credit Companies, Core Investment Companies, (CICs), Infrastructure Debt Funds, Infrastructure Finance Companies, Micro-Finance Institutions and Factors]; but, [Excluding – (i) NBFCs not accepting/not intending to accept public funds; (ii) Government Companies, (iii) Primary Dealers and (iv) Housing Finance Companies]

For NBFCs-D and NBFCs-ND, Capital and Asset Quality would be the key areas for monitoring in PCA Framework.

For CICs, Capital, Leverage and Asset Quality would be the key areas for monitoring in PCA Framework.

For NBFCs-D and NBFCs-ND, indicators to be tracked would be Capital to Risk Weighted Assets Ratio (CRAR), Tier I Capital Ratio and Net NPA Ratio (NNPA). For CICs, indicators to be tracked would be Adjusted Net Worth/Aggregate Risk Weighted Assets, Leverage Ratio and NNPA.

A NBFC will generally be placed under PCA Framework based on the audited Annual Financial Results and/or the Supervisory Assessment made by the RBI. However, the RBI may impose PCA on any NBFC during the course of a year (including migration from one threshold to another) in case the circumstances so warrant.

The Thresholds

The RBI said that it will impose PCA on NBFCs if there is any breach of any risk threshold.

For instance, if the Capital to Risk (Weighted) Assets Ratio (CRAR) falls up to 300 bps below the regulatory minimum CRAR, Tier-1 capital ratio falls up to 200 bps below the regulatory minimum and Net NPA (non-performing assets) ratio goes beyond 6 per cent, the NBFC will fall under risk threshold -1.

The central bank will then impose curbs on various business operations and will conduct special inspections and targeted scrutiny of the company.  For an NBFC under threshold-1, the RBI will impose restriction on dividend distribution/remittance of profits, also there will be restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies. 

Similarly, if the CRAR falls more than 300 bps but up to 600 bps below the regulatory minimum and tier-1 capital ratio falls more than 200 bps but up to 400 bps below the regulatory minimum and net NPA shoots up beyond 9 per cent, the NBFC will fall into risk threshold-2.

For such companies, in addition to the restrictions mentioned above, the RBI will impose restrictions on branch expansion, the central bank said.