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RBI Introduces PCA Framework for NBFCs

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RBI unveils PCA framework for NBFCs effective Oct 2022On December 14, 2021, the Reserve Bank of India (RBI) issued the Prompt Corrective Action (PCA) Framework for Non-Banking Financial Companies (NBFCs) to further strengthen the supervisory tools applicable to NBFCs.

  • The provisions of the PCA framework will be effective from October 2022 based on the financial position of NBFCs on or after March 31, 2022.
  • Note – Until now, the RBI had imposed PCA only on banks.

Applicability: 

The PCA framework will be applicable to

i.All Deposit-Taking NBFCs (NBFCs-D) (Excluding Government Companies)

ii.All Non-Deposit Taking NBFCs (NBFCs-ND) in Middle, Upper and Top Layers (Click here to know about the layer of NBFCs)

  • (Including Investment and Credit Companies, Core Investment Companies (CICs), Infrastructure Debt Funds, Infrastructure Finance Companies, Micro Finance Institutions and Factors); but
  • (Excluding – (i) NBFCs not accepting/not intending to accept public funds; (ii) NBFCc-ND with an asset size of less than Rs 1,000 crore; (iii) Government Companies, (iv) Primary Dealers and (v) Housing Finance Companies)

PCA Framework for SCBs: In November 2021, RBI has reviewed and revised the existing PCA framework for all Scheduled Commercial Banks (SCBs) excluding Small Finance Banks, Payment Banks and Regional Rural Banks. Click here to know more

Key Areas and Tracking Indicators under PCA:

i.For NBFCs-D and NBFCs-ND:

  • Key areas: Capital and Asset Quality would be the key areas for monitoring in PCA Framework.
  • Indicators to be Tracked: Capital to Risk-Weighted Assets Ratio (CRAR), Tier I Capital Ratio and Net NPA (Non-Performing Asset) Ratio (NNPA) would be the indicators to be tracked.

ii.For CICs:

  • Indicators to be Tracked: Adjusted Net Worth (ANW)/Aggregate Risk-Weighted Assets (RWA), Leverage Ratio and NNPA.
  • Key Areas: Capital, Leverage and Asset Quality would be the key areas for monitoring in PCA Framework.

What is PCA?

i.PCA is a framework under which banks with weak financial metrics are put under watch by the RBI. Under the Framework, the supervised Entity will be required to initiate and implement remedial measures in a timely manner to restore its financial health.

ii.The RBI introduced the PCA framework in December 2002 as a structured early-intervention mechanism to supervise and regulate the banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.

PCA Framework for NBFCs-D and NBFCs-ND (excluding CICs):

Indicator Risk Threshold 1             Risk Threshold 2 Risk Threshold 3
 

CRAR

Upto 300 bps (basis points) 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 Non-Performing Investments (NPIs))  

>6% but ≤ 9%

 

>9% but ≤12%

 

>12%

PCA Framework For CICs:

Indicator Risk Threshold 1             Risk Threshold 2 Risk Threshold 3
 

ANW/ Aggregate RWA

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%

Note – Breach of any risk threshold will result in invocation of PCA.

What happens if the PCA framework is imposed?

Mandatory actions:

Specifications Mandatory actions
 

Risk Threshold 1

Restriction on dividend distribution/remittance of profits.
Promoters/shareholders to infuse equity and reduction in leverage;
Restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies (only for CICs)
Risk Threshold 2 Mandatory actions of Threshold 1 and Restriction on branch expansion
 

Risk Threshold 3

Mandatory actions of Threshold 1 & 2
Restrictions on capital expenditure, other than for technological upgradation within Board approved limits
Restrictions/reduction in variable operating costs

About PCA Framework:

Features of PCA Framework for NBFCs:

i.Generally an NBFC will be placed under PCA framework based on the audited Annual Financial Results and/or the Supervisory Assessment made by the RBI.

ii.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.

iii.RBI may issue a press release when an NBFC is placed under PCA as well as when PCA is withdrawn.

Note – PCA framework for NBFCs will be reviewed by RBI after 3 years.

Recent Related News:

On October 22, 2021, RBI has introduced a  ‘Scale Based Regulation’ (SBR) for NBFCs, under which, NBFCs are categorised into 4 layers as Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL), and a possible Top Layer (NBFC-TL) based on the size, activity, complexity, and interconnectedness within the financial sector.

About Reserve Bank of India (RBI):

Establishment– April 1, 1935
Headquarters– Mumbai, Maharashtra
Governor– Shaktikanta Das
Deputy Governors– Mahesh Kumar Jain, Michael Debabrata Patra, M. Rajeshwar Rao, T. Rabi Sankar