Published on: December 15, 2021
PROMPT CORRECTIVE ACTION (PCA)
The Reserve Bank of India announced a Prompt Corrective Action (PCA) Framework for Non-Banking Financial Companies (NBFCs), to strengthen applicable supervisory tools.
- In line with the PCA framework for banks
- To help improve their financial condition and governance issues.
- Will apply to all deposit-taking NBFCs, all non-deposit taking NBFCs in the middle, upper and top layers, including investment and credit firms, core investment firms, infrastructure debt funds, infrastructure finance firms and microfinance institutions.
- Excluded NBFCs not accepting or not intending to accept public funds, primary dealers and housing finance firms, along with government-owned ones
- Objective – enable supervisory intervention at the appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner, so as to restore its financial health
- Framework under which banks with weak financial metrics
- Introduced by RBI in 2002
- Structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.
- Aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.
- Invoked when certain risk thresholds are breached. There are three risk thresholds which are based on certain levels of asset quality, profitability, capital and the like.
- There are two type of restrictions, mandatory and discretionary.