What changed
RBI extended the PCA framework, previously for scheduled commercial banks, to NBFCs due to their growing size and interconnectedness. The framework sets risk thresholds for CRAR, Tier I capital, and net NPA ratio (for most NBFCs) and for CICs, adjusted net worth/aggregate risk-weighted assets, leverage ratio, and net NPA ratio, with three levels of intervention. Government NBFCs have been provided time until March 31, 2022, to adhere to capital adequacy norms; a separate circular on PCA applicability for them will be issued later.
What it means for you
NBFCs must now maintain stricter capital and asset quality metrics to avoid PCA triggers, which could lead to supervisory restrictions. This enhances market discipline and early intervention, potentially limiting risk-taking. Banks with NBFC exposures should monitor their counterparties' PCA status, as it may affect credit risk and business continuity.
What you must do
- Review your NBFC's CRAR, Tier I capital, and net NPA ratios (or for CICs, adjusted net worth/aggregate risk-weighted assets, leverage ratio, and net NPA ratio) against PCA thresholds using audited annual results.
- Prepare contingency plans if your NBFC approaches risk threshold 1 (e.g., CRAR up to 300 bps below minimum).
- Engage with RBI proactively if any threshold breach is imminent, to discuss remedial measures.
- For banks lending to NBFCs, update credit risk assessments to include PCA status and potential restrictions.
Who it affects
All deposit-taking NBFCs (excluding government companies), Non-deposit-taking NBFCs in middle, upper, and top layers (including CICs, IDFs, IFCs, MFIs, factors), NBFCs not accepting/not intending to accept public funds, government companies, primary dealers, and HFCs are excluded, Banks and lenders with exposure to NBFCs
When does the PCA framework for NBFCs take effect?
It comes into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022.
What are the key indicators for PCA monitoring?
For deposit-taking and non-deposit-taking NBFCs (excluding CICs), indicators are CRAR, Tier I capital ratio, and net NPA ratio. For CICs, indicators are adjusted net worth/aggregate risk-weighted assets, leverage ratio, and net NPA ratio.
Can RBI impose PCA during the year without waiting for annual results?
Yes, RBI may impose PCA on any NBFC during the course of a year, including migration from one threshold to another, if circumstances warrant.