New Delhi, December 14, 2018 : .The Reserve Bank of India introduced Tuesday the prompt corrective (PCA), framework for nonbanking financial corporations (NBFCs).
It will be in effect starting October 1, 2022 based on the financial situation of NBFCs as of March 31, 2022.The central bank stated that NBFCs are growing in number and interconnected with many other parts of the financial sector.
The central bank stated that it was now decided to establish a PCA Framework to assist NBFCs in strengthening the supervision tools.
After three years, the PCA Framework is being reviewed.
This measure applies to all deposit-taking NBFCs, except government companies, and all non-deposit taking NBFCs within the ‘Middle Upper and Top Layers.
The PCA Framework would monitor both non-deposit and deposit taking NBFCs in the areas of capital and asset quality.
CICs, or core investment companies, would monitor the areas of capital and leverage as well as asset quality.
For ‘NBFCs D’ and NBFCs ND, the indicators to track would be Capital to Risk Weighted assets Ratio(CRAR), Tier I Capital Ratio and Net NPA Ratios (NNPA).
The CICs should track indicators such as the adjusted net worth or aggregate risk weighted assets, leverage ratio, and the NNPA,” according to the RBI.
The PCA Framework will place NBFCs based on their audited Annual Financial results or supervisory assessment by RBI.The central bank can, however, impose PCA to any NBFC within a 12-month period if the circumstances demand.
A.M.Karthik (ICRA Vice President, Sector Head, Financial Sector Ratings), stated that the PCA framework was introduced for NBFCs following a series of steps, including scale-based regulation and revisions in NPA recognition, which were taken by RBI in order to enhance the sector’s regulatory and supervision framework.
The thresholds for total capital adequacy or Tier-I capital to classify an NBFC under the PCA category as NBFCs are flexible.However, some entities may breach the net NPA criterion by more than 6 percent if their asset quality is not improved.
Among the large NBFCs, ICRA notes that about three entities are in breach of the net NPA criterion as of September 2021.However, all these entities have an established parentage.
Karthik also said that in view of the tightened NPA recognition and upgrade norms which became applicable from November 2021, NPA levels of NBFCs were expected to remain under pressure in the near-term.
“As PCA guidelines are applicable from October 2022, entities are expected to bring the NPA levels under control by improving provisions or effecting write-offs.
“NBFCs have good pre-provision profits to absorb the same, without adversely impacting their capital profile.”
However in view of the above regulatory changes, ICRA expects the sectoral growth to be impacted in the near-term, as entities tighten their credit norms and as operational focus may shift towards collections.
BCT Digital CEO Jaya Vaidhyanathan said: “Globally, shadow banking or lending entities outside the banking system have been under observation for possible excesses in credit due to their lax regulation compared to banks.
“Though regulation for these NBFCs is deliberately more lenient than banks, recent episodes like IL&FS, DHFL in India, and many in China have made regulators realise that checks and balances are required.Especially because NBFCs tend to borrow from banks and lend it to customers whom banks may not want to finance.”
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