Home / Industry / Banking /  PCA norms unlikely to impact NBFCs for now
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Many non-bank lenders have recently raised capital and kept bad loans under control, experts tracking the sector said, ahead of the new prompt corrective action (PCA) framework that kicks in from October. As a result, the Reserve Bank of India (RBI) move to regulate non-banking financial companies (NBFCs) on a par with banks is not expected to impact them immediately.

The new regulations will be based on the financials of NBFCs as on 31 March 2022. As NBFCs are interconnected with the banking system, RBI has been trying to bridge the gap in regulations between them and banks. After introducing scale-based regulations in October, RBI announced aligning asset quality classifications for them in November.

“It also reflects the growing size, scale and systemic importance of NBFCs," said Krishnan Sitaraman, senior director and deputy chief ratings officer, Crisil Ratings.

Capital adequacy and asset quality, the key factors influencing balance-sheet resilience, is what RBI will assess when referring NBFCs to the PCA framework, according to Sitaraman. The graded restrictions under the framework will enable NBFCs to take corrective action when they breach stipulated thresholds and reduce chances of insolvency, he said.

The PCA framework for NBFCs introduced on 14 December aims to nurse those with rickety balance sheets back to health. The regulator’s move came after several non-bank financiers faced liquidity troubles, resulting in three of them being taken to insolvency tribunals for resolution.

The central bank listed three risk thresholds that could result in NBFCs being placed under PCA. The objective is to enable supervisory intervention at the appropriate time and require NBFCs to initiate timely remedial measures. The guideline excludes government companies, NBFCs below 1,000 crore in size, and housing finance firms, among others.

For NBFCs excluding core investment firms, the first risk threshold would be breached if the capital adequacy ratio falls 300 basis points (bps) below the regulatory minimum of 15%. It would also be breached if tier-I capital ratio falls 200bps below the regulatory minimum ratio of 10%, and if the net bad loan ratio is more than 6%.

CareEdge Ratings said it does not expect any NBFC in its rated universe to be impacted by PCA. Some NBFCs have net non-performing assets (NPAs) of more than 6% and could have potentially breached the net NPA criteria. However, they have expressed keenness to focus on recovery and write-offs to move towards net NPA of less than 6% in their annual numbers for FY22, it said.

NBFCs would have to make more provisions to avoid PCA restrictions if there are asset quality surprises in the coming months, experts pointed out.

“As of now, most of the large NBFCs are comfortably poised to comply with the regulations. Many NBFCs have raised capital before and during the pandemic, leading to an improvement in their capital buffers, and carried excess expected credit loss provisions to navigate the pandemic impact on asset quality," said Jinay Gala, associate director at India Ratings and Research.

The new norms also establish a regulatory course of action in an event of a breach of certain parameters and would thus act as early warning signals, Gala said.

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