RBI Issues Prompt Corrective Action Norms For NBFCs

A month after it had come out with the revised prompt corrective action (PCA) framework for scheduled commercial banks, the Reserve Bank of India (RBI) today issued a similar set of norms for non-banking finance companies (NBFCs) by introducing three risk threshold categories.

The PCA framework for NBFCs will come into effect on October 1, 2022, based on their financial positions on or after March 31, 2022, the RBI said in a notification, adding that these will be reviewed after three years of being in operation.

PCA are restrictions which are imposed on a bank's operations by the RBI, if financial parameters of lending institutions fall below a certain range. Till now, the RBI imposed PCA only on banks. It had come out with revised PCA framework for banks on November 2, 2021.

The need to frame PCA norms for NBFCs was realised by RBI due to the growing size and complexity of NBFCs.

"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," the RBI said.

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.

An NBFC will be placed under PCA framework on the basis of the audited annual financial results or on the basis of the supervisory assessment made by the banking regulator.

However, the RBI may impose PCA on any NBFC during the course of a year (including migration from one threshold to another) in case the circumstances so warrant, it added.

Bringing a NBFC out of PCA can be considered if no breaches in risk thresholds in any of the parameters are observed during four continuous quarterly financial statements, one of which should be annual audited financial statement (subject to assessment by RBI) and on the basis of the supervisory comfort of the central bank, if it sees sustained profitability in the institution.