RBI issues prompt corrective action framework for NBFCs

The Reserve Bank of India (RBI) on Tuesday issued prompt corrective action (PCA) framework for Non-Banking Financial Companies (NBFCs).

"NBFCs have been growing in size and have substantial interconnectedness with other segments of the financial system. Accordingly, it has now been decided to put in place a PCA Framework for NBFCs to further strengthen the supervisory tools applicable to NBFCs," the central bank said in a statement.

The announcement comes after RBI had issued the revised Prompt Corrective Action (PCA) Framework for Scheduled Commercial Banks (SCBs) in November.

Moreover, the PCA framework for NBFCs will come into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022, RBI stated. The same will be reviewed after three years of being in operation.

The framework will apply to all deposit-taking NBFCs, excluding government companies, all non-deposit taking NBFCs in middle, upper and top layers, it added. It also mentioned that a separate circular would be issued in due course with regard to applicability of PCA Framework to government NBFCs.

What are the PCA risk thresholds for NBFCs?

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 Core Investment Companies (CICs), indicators to be tracked would be Adjusted Net Worth/Aggregate Risk Weighted Assets, Leverage Ratio and NNPA.

As stated by RBI, an NBFC will generally be placed under PCA framework based on the audited annual financial results and/or the supervisory assessment made by the banking regulator. 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, it added.

What happens when PCA framework is withdrawn? 

Taking the NBFC out of PCA and/or withdrawal of restrictions imposed under the framework will be considered:

a) if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements, one of which should be Annual Audited Financial Statement (subject to assessment by RBI); and

b) based on Supervisory comfort of the RBI, including an assessment on sustainability of profitability of the NBFC.

"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 banking regulator stated.

On November 2, 2021, the RBI had issued a revised PCA framework for banks to enable supervisory intervention at “appropriate time” and also act as a tool for effective market discipline, adding that the revised framework will be effective from January 1, 2022.

Capital, asset quality and leverage will be the key areas for monitoring in the revised framework, RBI had said.

When a bank is placed under PCA, one or more corrective actions may be prescribed based on the risk threshold. RBI defined three risk thresholds for banks based on different parameters.