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Economy
Mahesh

11/10/23 06:39 AM IST

RBI extends prompt corrective action framework to govt NBFCs

In News
  • The Reserve Bank of India has decided to extend the ‘prompt corrective action (PCA) framework for non-banking financial companies (NBFCs)‘ to government NBFCs (except those in base layer) with effect from October 1, 2024.
PCA
  • RBI initiated the Scheme of Prompt Corrective Action (PCA) in 2002.
  • Prompt Corrective Action or PCA is a framework under which financial institutions with weak financial metrics are put under watch by the RBI.
  • Until now, the RBI had imposed PCA only on banks. This is the first time PCA framework is extended to NBFCs.
  • The move comes in the wake of large NBFCs such as IL&FS, DHFL, SREI Group and Reliance Capital getting into financial trouble over the last few years.
    • The objective of the PCA Framework is to enable supervisory intervention at appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner, so as to restore its financial health.
    • The framework is also intended to act as a tool for effective market discipline. It does not preclude the apex bank from taking any other action as it deems fit at any time in addition to the corrective actions prescribed in the Framework.
    Indicators
    • The central bank will track three indicators
    • Capital To Risk-Weighted Assets Ratio (CRAR) - It is bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures.
    • Tier I leverage ratio - It is the relationship between a banking organization's core capital and its total assets.
    • Net Non-Performing Assets (NNPAS) Including Non-Performing Investments (NPIS). NPA are loans for which the principal or interest payment remained overdue for a period of over 90 days
    • In the case of core investment companies (CICs), the RBI will track
    • Adjusted Net Worth/Aggregate Risk Weighted Assets.
    • Leverage Ratio
    • NNPAs, including NPIs.
    • A breach in any of the three risk thresholds under the above mentioned indicators could result in invocation of PCA.
    Capital Adequacy Ratio
    • The CAR is a measure of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures.
    • CAR is the measurement ratio that assesses the ability of banks to absorb losses.
    • The Capital Adequacy Ratio, also known as capital-to-risk weighted assets ratio (CRAR), is used to protect depositors and promote the stability and efficiency of financial systems around the world.
    Source- The Hindu

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