In a recent development, the Reserve Bank of India (RBI) has expanded its prompt corrective action (PCA) framework to include government-owned financial institutions. This framework, which imposes business restrictions on lenders with weak financials, was originally designed to curb poor credit decisions by banks and was extended to finance companies in December 2021. However, government-owned finance companies were exempted initially, with the RBI allowing them time until March 2023 to meet minimum capital requirements.
RBI announced that the PCA framework will now be applicable to government Non-Banking Financial Companies (NBFCs) starting from October 1, 2024. Under the PCA guidelines, lenders can escape these restrictions by improving their financial health through capital infusion or better performance.
The objective of the PCA framework is to facilitate timely supervisory intervention, compelling entities to implement corrective measures promptly. These measures are vital for restoring the financial health of the supervised entities. Additionally, the framework serves as a tool for effective market discipline, enabling RBI to take necessary actions alongside the prescribed corrective measures. The RBI emphasized that the extension of the PCA framework to government-owned NBFCs underscores its commitment to maintaining a stable and healthy financial sector in the country.