{"id":153453,"date":"2021-12-15T20:21:21","date_gmt":"2021-12-15T14:51:21","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=153453"},"modified":"2021-12-15T20:21:21","modified_gmt":"2021-12-15T14:51:21","slug":"rbi-brings-nbfcs-under-prompt-corrective-action-framework","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/rbi-brings-nbfcs-under-prompt-corrective-action-framework\/","title":{"rendered":"RBI brings NBFCs under prompt corrective action framework"},"content":{"rendered":"\n
What is the News?<\/b><\/h5>\n

Reserve Bank of India(RBI) has introduced a <\/span>Prompt Corrective Action<\/span>(PCA) framework for large non-banking financial companies(NBFCs).<\/span><\/p>\n

What is the need for this PCA Framework for NBFCs?<\/strong><\/h5>\n

The PCA Framework for NBFCs has been brought after four big finance firms \u2014 IL&FS, DHFL, SREI and Reliance Capital \u2014 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 Rs 1 lakh crore to investors.<\/p>\n\n\n\n
Read more<\/strong>: 4-tier structure for regulation of NBFCs<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
What is the PCA Framework for NBFCs?<\/b><\/h5>\n
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Source: Business Standard<\/figcaption><\/figure>\n

The PCA framework for NBFCs will come into effect on October 1,2022 on the basis of their financial position on or after March 31.\u00a0<\/span><\/p>\n

The objective of the framework is to enable supervisory intervention at the appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner, to restore its financial health<\/span><\/p>\n

The framework will be <\/span>applicable to all deposit-taking non-banking financial companies (NBFCs), all non-deposit taking NBFCs in the middle, upper and top layers including investment and credit companies, core investment companies, infrastructure debt funds, infrastructure finance companies and microfinance institutions.<\/span><\/p>\n

However, it has excluded NBFCs not accepting\/not intending to accept public funds, primary dealers and housing finance companies along with government-owned ones.<\/span><\/p>\n

What are the indicators based on which PCA will be invoked for NBFC?<\/b><\/h5>\n

The central bank will track three indicators \u2014 capital to risk-weighted assets ratio (CRAR), Tier I ratio and net non-performing assets (NNPAs) including non-performing investments (NPIs).<\/span><\/p>\n

In the case of core investment companies (CICs), the RBI will track adjusted net worth\/aggregate risk-weighted assets, leverage ratio and NNPAs, including NPIs.<\/span><\/p>\n

A breach in any of the three risk thresholds under the above-mentioned indicators could result in invocation of PCA.<\/span><\/p>\n

What will happen once the PCA is invoked for an NBFC?<\/b><\/h5>\n

Based on the risk threshold, the RBI may prescribe mandatory corrective actions such as restriction on dividend distribution\/remittance of profits, requiring promoters \/shareholders to infuse equity and reducing leverage.<\/span><\/p>\n

The RBI can also<\/span> restrict the issuance of guarantees or take other contingent liabilities on behalf of group companies<\/span>(only for CICs).<\/span><\/p>\n

Further, the central bank may also restrict branch expansion, impose curbs on capital expenditure other than for technological up-gradation within board-approved limits and restrict\/ directly reduce variable operating costs.<\/span><\/p>\n

Source:<\/b> This post is based on the following articles\u00a0<\/span><\/p>\n