RBI brings NBFCs on par with banks in new PCA framework

New Delhi: To further strengthen the supervision on non-banking entities (NBFCs), the Reserve Bank on Tuesday issued revised guidelines on a Prompt Corrective Action (PCA) framework for such companies, excluding government-owned ones, effective from October 1, 2022, on the lines of what it had introduced for banks in 2002.

The RBI came up with stricter supervisory norms under the PCA framework for banks after their bad loans mounted and balance sheets bled badly. This involved restricting them from fresh lending, brand opening and, hiring, among others.

The RBI said the revised PCA framework is also applicable to all deposit-taking non-banking financial companies (NBFCs), all non-deposit-taking NBFCs in the middle, upper, and top layers, including investment and credit companies, core investment companies, infrastructure debt funds, infrastructure finance companies, and microfinance institutions.

However, it has excluded NBFCs not accepting/not intending to accept public funds, primary dealers, and housing finance companies along with government-owned ones.

Being put under the PCA framework means restrictions on dividend distribution/remittance of profits; promoters/shareholders to infuse equity and reduction in leverage; restrictions on the issue of guarantees or taking on other contingent liabilities on behalf of group companies, the RBI said. Special supervisory actions will be taken in matters regarding the breach in strategy, governance, core capital, credit risk, market risk, HR, and profitability, it added.

The mandatory curbs also include restrictions on branch expansion, capital expenditure (other than for technological upgrade within board-approved limits), and curbs on reduction in variable operating costs. The framework can also include RBI recommending to promoters/ shareholders to bring in new management/board, removing managerial persons under the RBI Act, removal of a director, and/or appointment of another person as director in his place.

Besides, the central bank can even supersede the board under the RBI Act, appoint an administrator and send the NBFC to NCLT for insolvency resolution. The new supervisory tools will be effective from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022, it said.

The objective of the PCA framework is to enable supervisory intervention at an appropriate time and requires the supervised entities to initiate and implement remedial measures in a timely manner so as to restore their financial health, the central bank said in a notification.

The framework is also intended to act as a tool for effective market discipline, it said, adding that it 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.

Under the revised regulatory PCA framework, the RBI said ”public funds” shall include funds raised either directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits, and bank finance. However, it excludes funds raised by the issue of instruments compulsorily convertible into equity shares within a period not exceeding five years from the date of issue.

The monetary authority said the measures are necessitated by NBFCs growing in size and their substantial interconnectedness with other segments of the financial system. Accordingly, it has now been decided to put in place a PCA framework for them to further strengthen the supervisory tools applicable to them.

On government-owned NBFCs, it said they have been given time till March 31, 2022, to adhere to the capital adequacy norms provided for NBFCs. A separate circular will be issued in due course with regard to the applicability of the PCA framework to them. The PCA framework will be reviewed after three years of being in operation.