The Reserve Bank of India (RBI) has extended the prompt corrective action (PCA) framework for NBFCs to government NBFCs with effect from October 1, 2024. Some of the major government owned non-banking financial companies (NBFCs) include PFC, REC, IRFC and IFCI.
Impact
- After the government owned NBFCs are put under the PCA framework there will be restrictions on dividend distribution/remittance of profits; restrictions on promoters/shareholders to infuse equity and reduction in leverage; and on the issue of guarantees or taking on other contingent liabilities on behalf of group companies.
- The framework is also intended to act as a tool for effective market discipline. It does not preclude the apex bank from taking any other action as it deems fit at any time in addition to the corrective actions prescribed in the Framework.
Prompt Corrective Action Framework (PCA)
- The RBI had introduced a Prompt Corrective Action Framework (PCA) 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 central bank introduced the PCA Framework for NBFCs on December 14, 2021. The Reserve Bank mentioned three risk threshold for applying PCA to NBFCs.
Objective of the PCA Framework
- 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.
Why NBFCs under PCA Framework?
- The NBFCs have been growing in size and have substantial interconnectedness with other segments of the financial system.
- Accordingly, the RBI in 2022 decided to put in place a PCA Framework for NBFCs to further strengthen the supervisory tools applicable to NBFCs.
