RBI Comes Up With Prompt Corrective Action Framework For Large NBFCs

The Reserve Bank of India (RBI) on Tuesday introduced a prompt corrective action (PCA) framework for large non-banking financial companies (NBFCs), putting restrictions on para-banks whenever vital financial metrics dip below the prescribed threshold. This brings them almost on a par with banks in terms of supervision and regulatory reach. The PCA framework for NBFCs comes into effect on October 1 next year on the basis of their financial position on or after March 31. Those not taking deposits and with an asset size of less than Rs 1,000 crore, primary dealers, government-owned NBFCs, and housing finance companies are exempt from this framework.

There will be three risk thresholds and three yardsticks to measure NBFCs under the PCA. The restrictions against an NBFC get progressively tightened as it breaches higher threshold levels. A breach of any criterion - the capital adequacy ratio, tier-1 capital ratio, and net NPA ratio -- triggers PCA action. The first risk threshold of the PCA will be triggered when the capital adequacy ratio of the NBFC falls below the regulatory minimum of 15 per cent. If the ratio falls below 12 per cent, the second risk threshold will be triggered, while the ratio falling below 9%triggers the third.

RBI noted that there are trigger points for tier-1 capital and the net NPA ratio as well. For core investment companies, leverage and asset quality will be the core criteria for evaluation. While an NBFC will be placed under the PCA on the basis of its audited annual financial results or the RBI's supervisory assessment, the PCA may also be imposed on an NBFC during the course of a year in case the circumstances compel the RBI to do so.

The common menu for Selection of Discretionary Corrective Actions include Special Supervisory Actions, strategy related Actions, governance related Actions, capital related Actions, Credit risk related Actions, Market risk related Actions, HR related Actions, Profitability related Actions and Operations related Actions.

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