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PCA framework for NBFCs: No immediate impact but will act as a deterrent and improve discipline

* RBI has put in place a Prompt Correction Active (PCA) framework for NBFCs to further strengthen the supervisory tools applicable to NBFCs.

* 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. PCA Framework will be reviewed after it has been effective for three years.

* PCA framework will be applicable to all a) deposit-taking NBFCs [NBFCs-D] and b) all non-deposit taking NBFCs in the middle, upper and top layers (NBFCs-ND) excluding government companies, primary dealers and HFCs

* Breach of any risk threshold (detailed in the sections below) might result in invocation of PCA

* For NBFCs-D and NBFCs-ND, Capital and Asset Quality would be the key areas for monitoring in PCA Framework. Respective Risk thresholds have been presented in Exhibit 1.

* For NBFC-CIC, Capital, Leverage and Asset Quality would be the key areas for monitoring in PCA Framework. Respective Risk thresholds for NBFC-CIC have been presented in Exhibit 2.

* An NBFC will generally be placed under PCA Framework based on the audited Annual Financial Results and/or the Supervisory Assessment made by the RBI. However, the RBI may impose PCA on any NBFC during the course of a year (including migration from one threshold to another) in case the circumstances so warrant.

* Corrective actions on breach of either of the risk thresholds 1, 2 or 3 will include certain mandatory actions and might also include certain discretionary actions from the RBI. Details are presented in Exhibit 3 below.

* Exit from PCA and withdrawal of restrictions under PCA: Taking the NBFC out of PCA Framework and/or withdrawal of restrictions imposed under the PCA Framework will be considered a) if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements, one of which should be Annual Audited Financial Statement (subject to assessment by RBI); and b) based on Supervisory comfort of the RBI, including an assessment on sustainability of profitability of the NBFC.

* RBI may issue a press release when a NBFC is placed under PCA as well as when PCA is withdrawn vis-à-vis a NBFC.

* Currently, only MMFS has Net Stage 3 in excess of 6% (6.4%) which it can conveniently bring down to less than 6% by the end of the current financial year. MMFS has, in the past, articulated that it will endeavour to deliver NNPA of <4% by the end of the financial year. This has to be seen in light of the recent RBI guidelines on NPA upgradations and daily stamping of NPA for NBFCs.

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