The Reserve Bank of India (RBI) has announced that strict monitoring norms under the Prompt Corrective Action (PCA) format will be applicable to government-owned non-banking financial companies (NBFCs) from October 2024. There are restrictions on distributing dividends/repatriating profits, investing or selling equity to promoters/shareholders and giving guarantees or taking on other contingent liabilities on behalf of group companies.
Main point
- This action will be based on the audited financial position of these NBFCs on or after March 31, 2024.
- The PCA framework is intended to enable timely supervisory intervention and require the supervised entity to initiate and implement timely remedial measures to improve its financial position.
- The PCA framework is also intended to serve as a tool for effective market discipline.
- The PCA framework does not prevent the Reserve Bank of India from taking any action it deems appropriate in addition to the corrective actions prescribed in the framework.
- The PCA framework for NBFCs came into effect from October 1, 2022, depending on the financial position of the NBFC as on March 31, 2022 and thereafter.
- The central bank had issued a circular to this effect to NBFCs in December, 2021.
Corrective action
RBI has prepared a menu of corrective actions for NBFCs/Core Investment Companies (CICs), depending on the level of violation of exposure limits
- Risk-Weighted Assets to Capital Ratio
- Tier-I capital ratio
- Net Non-Performing Assets Ratio for NBFCs
- Adjusted Net Worth/Total Risk Weighted Assets
- leverage ratio
- NNPA including non-performing investments for CICs
Corrective actions include restrictions on dividend distribution/remittance of profits
- Promoters/shareholders need to increase equity and reduce leverage
- Restrictions on issuing guarantees or incurring other contingent liabilities on behalf of group companies (only for CICs)
- Ban on branch expansion
- special supervisory action
- Discretionary functions related to governance, capital, profitability and business
Prompt Corrective Action (PCA)
- The Prompt Corrective Action (PCA) framework of the Reserve Bank of India (RBI) is an essential element of its financial stability framework.
- It provides a mechanism for early intervention and resolution by regulators of banks whose capital remains inadequate due to poor asset quality or which become weak due to declining profitability.
Non-Banking Financial Company
- Non-Banking Financial Company is a company which is registered under the Companies Act, 1956.
- He is engaged in the granting of loans and advances, acquisition, leasing, hire-purchase, insurance business, chit business of shares/stocks/bonds/debentures/securities issued by Government or local authorities or other similar marketable securities. Engaged in business.
- But they should not include any institution whose basic business is agriculture, industrial activity, buying and selling of any commodity (other than securities) or providing any service and buying/selling/construction of immovable property.
- A non-banking financial institution which is a company and whose principal business is the receiving of deposits through a scheme or arrangement or in any other form is also a non-banking financial company (residual non-banking company).