PCA framework for NBFCs
- December 15, 2021
- Posted by: OptimizeIAS Team
- Category: DPN Topics
PCA framework for NBFCs
Subject – Economy
Context – RBI unveils PCA framework for NBFCs effective Oct 2022
- The Reserve Bank of India (RBI) has decided to put in place a prompt corrective action (PCA) framework for troubled nonbanking finance companies to restore their financial health.
- Until now, the RBI had imposed PCA only on banks.
- The PCA framework for NBFCs comes into effect from October 1, 2022, based on their financial position on or after March 31, 2022.
- The framework will apply to all deposit-taking NBFCs, excluding government companies, and all non-deposit taking NBFCs in the middle, upper and top layers.
- The central bank will track three indicators —
- capital to risk-weighted assets ratio (CRAR),
- Tier I ratio and
- net non-performing assets (NNPAs), including non-performing investments (NPIs).
- In the case of core investment companies (CICs), the RBI will track adjusted net worth/aggregate risk weighted assets, leverage ratio and NNPAs, including NPIs.
- A breach in any of the three risk thresholds under the above-mentioned indicators could result in invocation of PCA.
- Based on the risk threshold, the RBI may prescribe mandatory corrective actions such as restriction on dividend distribution/remittance of profits, requiring promoters/shareholders to infuse equity and reduce leverage, and restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies (only for CICs).
- Further, the central bank may also restrict branch expansion, impose curbs on capital expenditure other than for technological upgradation within board approved limits and restrict/ directly reduce variable operating costs.
- Under discretionary corrective actions, the RBI may undertake resolution of NBFC by amalgamation, reconstruction, splitting; file insolvency application under the Insolvency and Bankruptcy Code and issue show-cause notice for cancellation of certificate of registration and winding up of the NBFC.
- The RBI may also recommend to promoters/shareholders to bring in new management/ board; remove managerial persons under the RBI Act, as applicable; seek removal of director and/or appointment of another person as director in his place; supersede the board under the RBI Act and appoint an administrator, among others.
- The central bank said the PCA framework for NBFCs will be reviewed after three years.
To know about PCA for Banks, please refer September 2021 DPN.
To know about PCA Revised Framework, please refer November 2021 DPN.