Home/ Industry / Banking/  RBI introduces prompt corrective action framework for NBFCs

The Reserve Bank of India (RBI) has introduced the prompt corrective action (PCA) framework for non-banking financial companies (NBFCs).

The central bank has defined three risk thresholds for applying prompt corrective action to NBFCs.

It may be recalled that the revised Prompt Corrective Action (PCA) Framework for Scheduled Commercial Banks (SCBs) was issued on November 2, 2021.

"NBFCs have been growing in size and have substantial inter-connectedness with other segments 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," RBI said in a statement

The new NBFC framework will be applicable all deposit taking NBFCs in middle, upper and top layers.

Jaya Vaidhyanathan, CEO of BCT Digital, which focuses on the risk management and regulatory needs of Banks and NBFCs said the RBI’s announcement of the PCA framework for NBFCs is a welcome move.

"Globally, shadow banking or lending entities outside the banking system have been under observation for possible excesses in credit due to their lax regulation compared to banks. Though regulation for these NBFCs is deliberately more lenient than banks, recent episodes like IL&FS, DHFL in India, and many in China have made regulators realize that checks and balances are required. Especially because NBFCs tend to borrow from banks and lend it to customers whom banks may not want to finance."

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, RBI said.

The same will be reviewed after three years of being in operation.

RBI had introduced a PCA framework for scheduled commercial banks in 2002 and the same has been reviewed from time to time based on the experience gained and developments in the banking system.

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. It does not preclude the RBI from taking any other action as it deems fit at any time in addition to the corrective actions prescribed in the framework.

Recently, the RBI has made NPA recognition norms for NBFCs tighter bringing them at par with banks. The PCA framework that has been in existence for banks has now been extended to NBFCs. Lenders showing deterioration in performance metrics like capital, asset quality, and leverage have to be restricted on paying dividends, opening branches, and CAPEX. Restrictions could be based on the severity of the situation while being subject to additional scrutiny till they come out of the bad phase. This is a welcome move, for it will stop bad lenders from going worse rather than brushing the issue aside. Ultimately, since NBFCs are now more closely integrated with the banking system than ever before, safer NBFCs also translate to a safer overall financial system, Jaya Vaidhyanathan further said.

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Updated: 14 Dec 2021, 07:03 PM IST
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