The Reserve Bank of India (RBI) announced that it will apply strict supervisory norms under the Prompt Corrective Action (PCA) Framework to government-owned Non-Banking Financial Companies (NBFCs) starting from October 2024. This move has significant implications for these government-owned NBFCs.
- Major government-owned NBFCs that will be subject to the PCA Framework include entities like Power Finance Corporation (PFC), Rural Electrification Corporation (REC), Indian Railway Finance Corporation (IRFC), and Industrial Finance Corporation of India (IFCI).
i.Application of PCA to Government-Owned NBFCs:
RBI has decided to extend the PCA framework to all deposit taking government NBFCs and non-deposit taking government NBFCs in middle, upper and top Layers (excluding base layer) with effect from October 1, 2024.
- This extension is based on the audited financials of the NBFC as of March 31, 2024, or subsequent dates.
ii.Objective – 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.
About Prompt Corrective Action (PCA)
Prompt Corrective Action (PCA), is a framework used by RBI to assess the financial health and stability of banks. The primary goal of PCA guidelines is to ensure that banks maintain sound financial conditions and take corrective actions when their financial health deteriorates. PCA guidelines are an essential tool for preventing bank failures and protecting the overall stability of the financial system.
Background of PCA:
i.Initially, the RBI introduced the PCA Framework for scheduled commercial banks (SCBs) in December 2002. This structured system was inspired by a similar framework used by the US Federal Deposit Insurance Corporation (FDIC) PCA framework.
ii.The regulations within this framework were later revised in April 2017, with a focus on monitoring capital, asset quality, and leverage.
iii.On November 2, 2021, the Reserve Bank of India (RBI) once again revised the Prompt Corrective Action (PCA) Framework.
iv.On December 14, 2021, RBI extended the PCA Framework for NBFCs
For NBFCs-D and NBFCs-ND (excluding CICs):
- NBFC-D – NBFC Deposit
- NBFC ND – NBFC Non-Deposit
- CIC – Core Investment Companies
| Indicator | Risk Threshold-1 | Risk Threshold-2 | Risk Threshold-3 |
|---|---|---|---|
| CRAR | Upto 300 bps below the regulatory minimum CRAR [currently, CRAR <15% but ≥12%] | More than 300 bps but upto 600 bps below regulatory minimum CRAR [currently, CRAR <12% but ≥9%] | More than 600 bps below regulatory minimum CRAR [currently, CRAR <9%] |
| Tier I Capital Ratio | Upto 200 bps below the regulatory minimum Tier I Capital Ratio [currently, Tier I Capital Ratio <10% but ≥8%] | More than 200 bps but upto 400 bps below the regulatory minimum Tier I Capital Ratio [currently, Tier I Capital Ratio <8% but ≥6%] | More than 400 bps below the regulatory minimum Tier I Capital Ratio [currently, Tier I Capital Ratio <6%] |
| NNPA Ratio (including NPIs) | >6% but ≤ 9% | >9% but ≤12% | >12% |
For CICs:
| Indicator | Risk Threshold-1 | Risk Threshold-2 | Risk Threshold-3 |
| Adjusted Net Worth / Aggregate Risk Weighted Assets | Upto 600 bps below the regulatory minimum ANW/RWA [currently, ANW/RWA <30% but ≥24%] | More than 600 bps but upto 1200bps below regulatory minimum ANW/RWA [currently, ANW/RWA <24% but ≥18%] | More than 1200 bps below regulatory minimum ANW/RWA [currently, ANW/RWA <18%] |
| Leverage Ratio | ≥2.5 times but <3 times | ≥ 3 times but <3.5 times | ≥3.5 times |
| NNPA Ratio (including NPIs) | >6% but ≤ 9% | >9% but ≤12% | >12% |
Violation of any risk threshold, as outlined, could lead to the activation of PCA.
Corrective actions are as below:
| Mandatory and Discretionary actions | ||
|---|---|---|
| Specifications | Mandatory actions | Discretionary actions |
| Risk Threshold 1 |
| Common menu
|
| Risk Threshold 2 | In addition to mandatory actions of Threshold 1,
| |
| Risk Threshold 3 | In addition to mandatory actions of Threshold 1 & 2,
| |
RBI Instructs Bank of Baroda to Halt Customer Onboarding on Mobile App
The Reserve Bank of India, under section 35A of the Banking Regulation Act, 1949, has ordered Bank of Baroda to immediately suspend the process of adding more customers to the ‘bob World’ mobile application.
- This measure is prompted by the identification of “certain material supervisory concerns” during the customer onboarding process for the ‘bob World’ mobile application. This was aimed at increasing the registration number of BoB World.
- The bank is also instructed to ensure that existing ‘bob World’ customers experience no disruptions due to this suspension
- This ban comes after RBI had already imposed a fine of Rs 30 lakh on Bank of Baroda earlier this year, for deficiencies in regulatory compliance related to Know-Your-Customer (KYC) norms.
About bob World:
i.The bank originally introduced its mobile banking application as the pilot project ‘Baroda M-Connect’ in 2011.
- In 2021, it introduced ‘bob World’ to cater to its customers’ needs.
- The bank’s annual report for FY23 highlights that over the past two years, the bank has consistently added 10 million new customers to ‘bob World’ annually, a notable achievement in the Indian banking sector.
ii.The bank has adjusted the interest rates for its Tiranga Plus Deposit Scheme, offering senior citizens an interest rate of 7.80% p.a. on non-callable deposits under the scheme.
About Bank of Baroda:
Managing Director & CEO – Shri Debadatta Chand
Headquarters– Vadodara, Gujarat,
Establishment – 20 July 1908
Tagline– India’s International Bank
RBI’s Monetary Policy Report: Bank Credit Composition Shows Significant Transformation Over Time
As per the RBI’s monetary policy report,bank lending has changed significantly, with more credit now directed towards services and retail loans compared to industries.
Comparison of Composition in Bank Outstanding Credit: March 2023 vs. March 2013
| Composition of Bank outstanding Credit | March 2023 | March 2013 |
|---|---|---|
| Personal/Retail loans | 32.1% | 18% |
| Services | 28.4% | 24% |
| Industry | 26.2% | 46% |
| Agriculture | 13.3% | 12% |
Outlook for Bank Credit (FY24):
- Expected credit growth in the range of 13.0%–13.5% for FY24 (excluding the HDFC-HDFC Bank merger impact).
- Personal loans segment expected to outperform industry and service segments in FY24.
- Higher demand for loans is expected from mining, infrastructure and personal/retail sectors in Q3FY24 .
