RBI extends Prompt Corrective Action (PCA) Framework for Government NBFCs

Reserve Bank of India on Tuesday extended the Prompt Corrective Action (PCA) Framework for Government Non-Banking Financial Companies (NBFCs).

“Reserve Bank of India introduced the PCA Framework for NBFCs on December 14, 2021. The Framework has since been reviewed and it has been decided to extend the same to Government NBFCs (except those in Base Layer) with effect from October 1, 2024, based on the audited financials of the NBFC as of March 31, 2024, or thereafter” said RBI circular.

The Prompt Corrective Action (PCA) framework can be defined as a set of guidelines that enables the RBI to judge banks and NBFCs when they slip below certain norms across three parameters: capital ratios, asset quality, and profitability.

When an NBFC is put under the PCA framework, there will be restrictions on dividend distribution/remittance of profits; and also restrictions on promoters/shareholders to infuse equity and reduction in leverage; and on the issue of guarantees or taking on other contingent liabilities on behalf of group companies.

Some of the major government-owned non-banking financial companies (NBFCs) include India Infrastructure Finance Company Ltd (IIFCL), Industrial Finance Corporation of India (IFCI), Power Finance Corporation (PFC), REC Limited (formerly Rural Electrification Corporation Limited), Indian Railway Finance Corporation (IRFC).

The framework for taking corrective measures was first introduced in 2002 for scheduled commercial banks to enable supervisory intervention at appropriate times and guide financially weak banks with high ratio bad assets and lower levels of capital adequacy to take remedial measures to restore financial health.