Prompt Corrective Action (PCA) Framework for NBFCs

The Prompt Corrective Action (PCA) Framework for NBFCs is a set of guidelines issued by the Reserve Bank of India (RBI) to regulate the financial health of NBFCs. The PCA Framework was first introduced in 2002 for banks and was extended to NBFCs in 2021.

Objective of the PCA Framework

The objective of the PCA Framework is to identify NBFCs that are at risk of financial distress and to take corrective action to prevent them from failing. The PCA Framework is designed to protect the interests of depositors, investors, and creditors of NBFCs.

Triggers for PCA

NBFCs are triggered into the PCA Framework if they meet any of the following criteria:

  • Capital adequacy ratio (CAR) below 15%
  • Net non-performing assets (NPA) ratio above 5%
  • Return on assets (ROA) negative for two consecutive years

PCA Stages

Once an NBFC is triggered into the PCA Framework, it is placed in one of three stages:

  • Stage 1: This is the least severe stage and is triggered by a breach of any one of the PCA triggers.
  • Stage 2: This stage is triggered by a breach of two of the PCA triggers.
  • Stage 3: This is the most severe stage and is triggered by a breach of all three PCA triggers.

PCA Restrictions

NBFCs that are placed under the PCA Framework are subject to a number of restrictions, including:

  • Restrictions on lending and investments
  • Restrictions on dividend payments
  • Restrictions on opening new branches
  • Increased monitoring by the RBI

Exit from PCA

NBFCs can exit from the PCA Framework if they meet the following criteria:

  • Capital adequacy ratio (CAR) above 15%
  • Net non-performing assets (NPA) ratio below 4%
  • Return on assets (ROA) positive for two consecutive years

Conclusion

The PCA Framework is an important tool used by the RBI to regulate the financial health of NBFCs. The PCA Framework is designed to protect the interests of depositors, investors, and creditors of NBFCs.

MCQs

  1. Which of the following is not an objective of the PCA Framework for NBFCs?
    • (a) To identify NBFCs that are at risk of financial distress
    • (b) To take corrective action to prevent NBFCs from failing
    • (c) To protect the interests of depositors, investors, and creditors of NBFCs
    • (d) To maximize the profits of NBFCs
  2. Which of the following is a trigger for PCA in NBFCs?
    • (a) Capital adequacy ratio (CAR) below 15%
    • (b) Net non-performing assets (NPA) ratio above 5%
    • (c) Return on assets (ROA) negative for two consecutive years
    • (d) All of the above
  3. Which of the following is a PCA restriction?
    • (a) Restrictions on lending and investments
    • (b) Restrictions on dividend payments
    • (c) Restrictions on opening new branches
    • (d) All of the above
  4. Which of the following criteria must an NBFC meet to exit from PCA?
    • (a) Capital adequacy ratio (CAR) above 15%
    • (b) Net non-performing assets (NPA) ratio below 4%
    • (c) Return on assets (ROA) positive for two consecutive years
    • (d) All of the above

Answers

  1. (d) To maximize the profits of NBFCs
  2. (d) All of the above
  3. (d) All of the above
  4. (d) All of the above