The Reserve Bank of India has decided to extend the ‘prompt corrective action (PCA) framework for non-banking financial companies (NBFCs)‘ to government NBFCs (except those in base layer) with effect from October 1, 2024.

This will be based on the audited financials of these NBFCs as on March 31, 2024, or thereafter.

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.

The PCA framework does not preclude the Reserve Bank of India from taking any other action as it deems fit at any time in addition to the corrective actions prescribed in the framework.

The PCA framework for NBFCs came into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022. The central bank had issued a circular to this effect to NBFCs in December 2021.

Corrective actions

The RBI has drawn up a menu of corrective actions for NBFCs/ core investment companies (CICs), depending on the level of breach of the risk threshold (relating to capital to risk-weighted assets ratio, tier-I capital ratio, and net non-performing assets ratio for NBFCs, and adjusted net worth/aggregate risk weighted assets, leverage ratio and NNPAs, including non-performing investments for CICs).

Corrective actions include restriction on dividend distribution/remittance of profit; requiring promoters/shareholders to infuse equity and reduce leverage; restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies (only for CICs); restriction on branch expansion; special supervisory actions; discretionary actions related to governance, capital, profitability and business.

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