RBI comes up with PCA framework for NBFCs: Here’s what it means

The Reserve Bank of India (RBI) on Tuesday introduced the prompt corrective action (PCA) framework for non-banking financial companies (NBFCs).

For applying prompt corrective action to NBFCs the central bank has defined three risk thresholds

Although, the revised (PCA) Framework for Scheduled Commercial Banks (SCBs) was issued on November 2, 2021.

“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,” RBI said in a statement

This new NBFC framework will be applicable to all deposit-taking NBFCs in the middle, upper and top layers.

PCA a welcome regulatory move?

RBI’s this announcement of the PCA framework for NBFCs can be seen as a welcome move.

This comes in the wake of shadow banking threats worldwide. Globally, shadow banking or lending entities outside the banking system have been under observation for possible excesses in credit. This happens due to their lax regulation as compared to the banks.

Also, the NBFCs tend to borrow from banks and lend it to customers whom banks may not want to finance.

This PCA framework for NBFCs will be effective from October 1, 2022. It will be based on the financial position of NBFCs on or after March 31, 2022, RBI said.

Who is Falguni Nayar?

The same will be reviewed after three years of being in operation. In 2002, the central bank had introduced a PCA framework for scheduled commercial banks. It kept reviewing the same from time to time based on the experience gained and developments in the banking system.

The objective of the PCA framework remains to enable supervisory intervention at an appropriate time. It also calls for remedial measures in a timely manner, so as to restore its financial health.

The PCA framework also serves as an effective market discipline. Largely, this is seen as a welcome move as it will stop bad lenders from going worse.

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