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RBI brings NBFCs under prompt corrective action framework

The RBI decision has come after four big finance firms — IL&FS, DHFL, SREI and Reliance Capital — which collected public funds through fixed deposits and non-convertible debentures collapsed in the last three years despite the tight monitoring in the financial sector. They collectively owe over Rs 1 lakh crore to investors.

By: ENS Economic Bureau | Mumbai |
December 15, 2021 5:15:49 am
The application said the petitioners undertook a study on the distress and inequalities faced by the visually impaired citizens due to the design of the currency notes which makes it difficult for them to distinguish between various denominations of the currency.

The Reserve Bank of India (RBI) has decided to bring non-banking finance companies (NBFCs) under the ambit of the prompt corrective action (PCA) framework.

Under the framework, NBFCs will face restrictions when certain parameters like non-performing assets, capital adequacy ratio and Tier 1 capital fall below the stipulated levels. Banks are already under the framework. The PCA framework for NBFCs will come into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022, the RBI said in a notification on Tuesday. It will be applicable for all deposit-taking NBFCs — excluding government NBFCs, primary dealers and housing finance companies — and other non-deposit taking NBFCs in the middle, upper and top layers.

The RBI decision has come after four big finance firms — IL&FS, DHFL, SREI and Reliance Capital — which collected public funds through fixed deposits and non-convertible debentures collapsed in the last three years despite the tight monitoring in the financial sector. They collectively owe over Rs 1 lakh crore to investors.

There are three risk thresholds in the PCA framework for NBFCs. An NBFC under PCA framework, caused by triggering the first threshold, will be restricted on dividend distribution, promoters will be asked to infuse capital and reduce leverage. The RBI will also restrict issuance of guarantees or taking other contingent liabilities on behalf of group companies, in case of core investment companies. After hitting risk threshold 2, the NBFC will be prohibited from opening branches, while on risk threshold 3, capital expenditure will be stopped, other than for technological upgradation.

PCA will be imposed if the net non-performing assets is between 6-9 per cent (risk threshold 1), 9-12 per cent (risk threshold 2) and greater than 12 per cent (risk threshold 3). If the capital adequacy ratio falls 300 basis points from the current level of 15-12 per cent (risk threshold 1), 300-600 bps from 12-9 per cent (risk threshold 2) and by 600 bps from 9 per cent (risk threshold 3), PCA will be imposed. There will be other issues such as heightened regulatory supervision and inspections. The RBI will also actively engage with the board of the NBFCs on various aspects as deemed appropriate by the central bank.

According to the RBI, 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,” it said. The RBI said the objective of the 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 from taking any other action as it deems fit at any time in addition to the corrective actions prescribed in the framework,” it said.

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