State-owned NBFCs put under PCA norms

Source: The post is based on the article “State-owned NBFCs put under PCA norms” published in “The Hindu” on 11th October 2023

What is the News?

The Reserve Bank of India(RBI) has announced that it will bring state-owned non-banking finance companies(NBFCs) under the prompt corrective action (PCA) framework from October 2023.

What is the Prompt corrective action (PCA) framework?

Prompt Corrective Action or PCA is a framework under which financial institutions with weak financial metrics are put under watch by the RBI.

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 framework is also intended to act as a tool for effective market discipline.

The framework also does not preclude the Reserve Bank of India from taking any other action as it deems fit at any time in addition to the corrective actions prescribed in the framework.

The PCA Framework for NBFCs came into effect from October 1, 2022 based on the financial position of NBFCs on or after March 31, 2022.

What happens when an NBFC is put under the PCA framework?

The RBI has drawn up a menu of corrective actions for NBFCs/ core investment companies (CICs), depending on the level of breach of the risk threshold.These actions include:

1) Restriction on dividend distribution/remittance of profit 2) requiring promoters/shareholders to infuse equity and reduce leverage 3) restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies (only for CICs) 4) restriction on branch expansion; special supervisory actions and 5) discretionary actions related to governance, capital, profitability and business.