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When are NBFCs placed under PCA? What are its implications?

We have heard about some banks being placed under Prompt Corrective Action (PCA) framework by Reserve Bank of India (RBI). Similar guidelines have also been introduced for Non-Banking Financial Companies (NBFCs) which will be applicable from October 01, 2022. What is this PCA framework? And what does it mean for NBFCs placed under PCA?

What is Prompt Corrective Action (PCA) framework?

Prompt Corrective Action (PCA) framework enables detection of deteriorating financial health of an NBFC and requires the NBFC to initiate and implement remedial measures for its timely restoration. 

From when will PCA framework be applicable to NBFCs?

The PCA framework for NBFCs will come into effect from October 1, 2022, based on the financial position of NBFCs on / after March 31, 2022. The framework will be reviewed after 3 years of being in operation.

To which NBFCs is PCA framework applicable?

The PCA framework is applicable to the following categories of NBFCs –

  1. All Deposit Taking NBFCs [Excluding Government Companies] (NBFCs-D)
  2. All Non-Deposit Taking NBFCs in Middle, Upper and Top Layers (NBFCs-ND) 

    • Including Investment and Credit Companies, Core Investment Companies (CICs), Infrastructure Debt Funds, Infrastructure Finance Companies, Micro Finance Institutions and Factors.
    • Excluding –NBFCs not accepting / not intending to accept public funds, Government Companies, Primary Dealers and Housing Finance Companies.

Update on October 10, 2023

The PCA framework will be extended to Government NBFCs (except those in Base Layer) with effect from October 01, 2024, based on the audited financials of the NBFC as on March 31, 2024, or thereafter.

What parameters are considered under PCA framework?

For the purpose of PCA framework, the financial health of NBFCs-D and NBFCs-ND is evaluated in terms of following 2 parameters –

  1. Capital – indicated by Capital to Risk-Weighted Asset Ratio (CRAR) / Tier-1 Capital Ratio
  2. Asset Quality – indicated by Net Non-Performing Assets (NNPA) ratio

For PCA framework, the financial health of CICs is evaluated in terms of following 3 parameters –

  1. Capital – indicated by Adjusted Net Worth / Aggregate Risk Weighted Assets
  2. Leverage – indicated by Leverage Ratio 
  3. Asset Quality – indicated by Net Non-Performing Assets (NNPA) ratio

What are the thresholds for invocation of PCA for NBFCs-D and NBFCs-ND (excluding CICs)?

For NBFCs-D and NBFCs-ND (excluding CICs), the breach of risk thresholds for any of the indicators of capital or asset quality may result in invocation of PCA framework.

Risk thresholds for Capital

Parameter Capital
Indicator Capital to Risk-Weighted Asset Ratio (CRAR) Tier-1 Capital Ratio
Risk Threshold 1 Upto 300 bps below the regulatory minimum CRAR [currently, CRAR <15% but ≥12%] Upto 200 bps below the regulatory minimum Tier I Capital Ratio [currently, Tier I Capital Ratio <10% but ≥8%]
Risk Threshold 2 More than 300 bps but upto 600 bps below regulatory minimum CRAR [currently, CRAR <12% but ≥9%] More than 200 bps but upto 400 bps below the regulatory minimum Tier I Capital Ratio [currently, Tier I Capital Ratio <8% but ≥6%]
Risk Threshold 3 More than 600 bps below regulatory minimum CRAR [currently, CRAR <9%] More than 400 bps below the regulatory minimum Tier I Capital Ratio [currently, Tier I Capital Ratio <6%]

Risk thresholds for Asset Quality

Parameter Asset Quality
Indicator Net Non-Performing Assets (NNPA) ratio (including NPIs)
Risk Threshold 1 > 6% but ≤ 9%
Risk Threshold 2 > 9% but ≤ 12%
Risk Threshold 3 > 12%

What are the thresholds for invocation of PCA for CICs?

For CICs, the breach of risk thresholds for any of the indicators of capital, leverage or asset quality may result in invocation of PCA framework.

Risk thresholds for Capital

Parameter Capital
Indicator Adjusted Net Worth / Aggregate Risk Weighted Assets
Risk Threshold 1 Upto 600 bps below the regulatory minimum ANW / RWA [currently, ANW / RWA <30% but ≥24%]
Risk Threshold 2 More than 600 bps but upto 1200bps below regulatory minimum ANW / RWA [currently, ANW / RWA <24% but ≥18%]
Risk Threshold 3 More than 1200 bps below regulatory minimum ANW / RWA [currently, ANW / RWA <18%]

Risk thresholds for Leverage

ParameterLeverage
IndicatorLeverage Ratio
Risk Threshold 1≥ 2.5 times but < 3 times
Risk Threshold 2≥ 3 times but < 3.5 times
Risk Threshold 3≥ 3.5 times

Risk thresholds for Asset Quality

Parameter Asset Quality
Indicator Net Non-Performing Assets (NNPA) ratio (including NPIs)
Risk Threshold 1 > 6% but ≤ 9%
Risk Threshold 2 > 9% but ≤ 12%
Risk Threshold 3 > 12%

What is the data point for assessing the risk thresholds?

The risk thresholds are generally assessed based on the Audited Annual Financial Results and / or the Supervisory Assessment made by RBI. If required, PCA framework may also be imposed on any NBFC during the year (including migration from one threshold to another).

What mandatory restrictions are imposed on NBFCs placed under PCA?

When an NBFC is placed under PCA, one or more of the following mandatory corrective actions may be prescribed for NBFCs –

SpecificationsMandatory actions
Risk Threshold 1Restriction on dividend distribution / remittance of profits.
Promoters / shareholders to infuse equity and reduction in leverage
Restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies (only for CICs)
Risk Threshold 2In addition to mandatory actions of Threshold 1 –
Restriction on branch expansion
Risk Threshold 3In addition to mandatory actions of Threshold 1 and 2 –
Appropriate restrictions on capital expenditure, other than for technological upgradation within Board approved limits
Restrictions / reduction in variable operating costs

What discretionary actions can be taken for NBFCs placed under PCA?

When an NBFC is placed under PCA, one or more of the following discretionary corrective actions may be prescribed for NBFCs –

  1. Special Supervisory Actions
  2. Strategy related
  3. Governance related
  4. Capital related
  5. Credit risk related
  6. Market risk related
  7. HR related
  8. Profitability related
  9. Operations / Business related
  10. Any other

When can NBFCs exit PCA restrictions?

Taking an NBFC out of PCA framework and / or withdrawal of restrictions imposed under PCA framework can be considered –

  1. If no breaches are observed in risk thresholds of any of the parameters as per the four continuous quarterly financial statements, one of which should be Audited Annual Financial Statement (subject to assessment by RBI); and 
  2. Based on Supervisory comfort of RBI, including an assessment on sustainability of profitability of the NBFC.


References

Reserve Bank of India. (2021, December 14). 'Prompt Corrective Action (PCA) Framework for Non-Banking Financial Companies (NBFCs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12208&Mode=0#:~:text=D.,E.

Reserve Bank of India. (2023, October 10). 'Prompt Corrective Action (PCA) Framework for Non-Banking Financial Companies (NBFCs) – Extension to Government NBFCs". Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12543&Mode=0


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