On 15th December, 2021, the RBI introduced a prompt corrective action (PCA) framework for large non-banking financial companies (NBFCs). It aims to nurse those with rickety balance sheets back to health.
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.
Need
IL&FS, DHFL, SREI and Reliance Capital, big four financial firms collapsed in the last three years despite the tight monitoring in the financial sector. They collectively owe over Rs. 1 lakh crore to investors.
Applicability
All deposit-taking non-banking financial companies (NBFCs)
All-non-deposit taking NBFCs in the middle, upper and top layers, including investment
Credit companies
Core investment companies
Infrastructure debt funds
Infrastructure finance companies
Microfinance institutions
However, those not taking deposits and with an asset size of less than Rs 1,000 crore, primary dealers, government-owned NBFCs, and housing finance companies are exempt from this framework.
Significance
It willbring NBFCs almost on a par with banks in terms of supervision and regulatory reach. It is also intended to act as a tool for effective market discipline.
The graded restrictions under the framework will enable NBFCs to take corrective action when they breach stipulated thresholds. That would reduce the chances of insolvency.
