December 17, 2021 - 12:41 pm

RBI Brings NBFCs Under PCA Framework

    The Reserve Bank of India (RBI) on Tuesday introduced a prompt corrective action (PCA) framework for large non-banking financial companies (NBFCs). Under the framework, NBFCs will face restrictions when certain parameters like non-performing assets (NPAs), capital adequacy ratio (CAR) and Tier 1 capital fall below the stipulated levels. The PCA Framework for NBFCs will come into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022.

    The RBI decision has come after 4 big finance firms - IL&FS, DHFL, SREI and Reliance Capital - which collected public funds through fixed deposits and non-convertible debentures collapsed in the last three years despite the tight monitoring in the financial sector- they collectively owe over ₹1,00,000 crore to investors. This brings them almost on a par with banks in terms of supervision and regulatory reach. This follows the scale-based regulation and revision in NPA norms brought in by the regulator for the sector. It will be applicable for all deposit taking NBFCs - excluding government. NBFCs primary dealers and housing finance companies - and other non-deposit taking NBFCs in the middle, upper and top layers.

    There will be three risk threshold and three yardsticks to measure them. An NBFC under PCA, caused by triggering first threshold, will be restricted on dividend distribution, promoters will be asked to infuse capital and reduced leverage. The RBI will also restrict its issuance of guarantees or taking other contingent liabilities on behalf of group companies, in case of core investment companies. After hitting threshold 2, it will be prohibited from opening branches, while on threshold 3, capital expenditure will be stopped, other than for tech upgrading.

    At a time when the economy is recovering and the government is urging financial institutions to lend more, are RBI norms liberating lending or restricting the NBFC? The central bank notified that the objective of the PCA framework is to enable supervisory intervention at appropriate time and requires a supervised entities to initiate and implement remedial measures in a timely manner so as to restore their financial health. According to the RBI, NBFCs have been growing in size and have substantial interconnectedness with other segment of the financial system. "Accordingly, a PCA Framework for NBFCs has also been put in place to further strengthen the supervisory tools applicable to NBFCs.