Prompt Corrective Action (PCA) Framework for NBFCs- Things to Know

Reserve Bank of India (RBI) has brought non-banking finance companies (NBFCs) under the ambit of prompt corrective action (PCA) framework.

Key Points

• Under the PCA framework, NBFCs will face restrictions when parameters such as capital adequacy ratio, non-performing assets, and Tier 1 capital will fall below the stipulated levels.
• Banks are already covered under the framework.
• The PCA framework for NBFCs will be implemented from October 1, 2022, on the basis of financial position of NBFCs on or after March 31, 2022.
• PCA framework will be applicable for all deposit-taking NBFC. However, it will exclude government NBFCs, housing finance companies, primary dealers and other non-deposit taking NBFCs in the upper, middle, and top layers.
• Under the framework, RBI will also restrict issuance of guarantees or taking other contingent liabilities for group companies. When the NBFC will hit the risk threshold 2, it will be prohibited from opening branches. On hitting the risk threshold 3, capital expenditure of NBFC will be stopped.

When will PCA be imposed?

PCA will be imposed when the net non-performing assets is in between:

1. 6-9 percent (risk threshold 1)
2. 9-12 percent (risk threshold 2)
3. More than 12 percent (risk threshold 3)

Background

The RBI took decision after four big finance firms namely IL&FS, DHFL, SREI and Reliance Capital, collected public funds by means of fixed deposits & non-convertible debentures and collapsed in last three years despite there was tight monitoring in the financial sector. These firms collectively owe more than Rs 1 lakh crore to investors.

Month: Current Affairs - December, 2021