RBI’s stricter PCA rule to enhance NBFCs’ regulation

The RBI introduced stricter prompt corrective action framework for large NBFC to improve regulatory reach, with effect from Oct 1.
Reserve Bank of India (Photo | PTI)
Reserve Bank of India (Photo | PTI)

NEW DELHI:  The Reserve Bank of India (RBI) on Tuesday introduced stricter prompt corrective action (PCA) framework for large non-banking financial companies (NBFC) to improve regulatory reach, with effect from Oct 1.

The framework will apply to all deposit-taking NBFCs, excluding government companies, all non-deposit taking NBFCs in middle, upper and top layers, the RBI said. Till now, the RBI used to impose PCA only on banks.

“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 RBI said in its statement.

The framework is also intended to act as a tool for effective market discipline. According to the central bank, the first trigger of the PCA will be when the capital adequacy ratio of the NBFC falls below 300 basis points of the regulatory minimum requirement of 15%. 

If the Tier-1 capital, or core capital, falls 200 basis points below 10% then also the PCA will be triggered. Also, if the net non-performing assets (NNPA) ratio is greater than 6%, but less than or equal to 9%, then the first risk threshold will be triggered.

Once an NBFC falls under PCA, it will be restricted on dividend distribution, will restrict issuance of guarantees, opening branches and restricting capital expenditure, depending on the risk threshold.

Taking the NBFC out of PCA framework or withdrawal of restrictions imposed under the PCA framework will be considered if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements, one of which should be annual audited financial statement, the RBI said.

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