Prompt Corrective Action (PCA) Framework

Prompt Corrective Action (PCA) Framework

News: Recently, The RBI has announced the extension of the PCA framework to Government Non-Banking Financial Companies (NBFCs), excluding those in the Base Layer, starting from October 1, 2024.

Which NBFC’s will come under PCA framework?
• Power Finance corporation, Rural Electrification Corporation Limited, ndian Railway Finance Corporation, Industrial Finance Corporation of India.

What is the PCA framework?
• The Prompt Corrective Action (PCA) Framework is a mechanism introduced by the Reserve Bank of India which is designed to monitor banks with weak financial metrics and intervene early to restore their financial health.
• The framework is applied to banks that become undercapitalized due to poor asset quality or become vulnerable due to loss of profitability.
• The PCA Framework focuses on three key areas - Capital, Asset Quality, and Leverage.
• The indicators tracked for these areas are the CRAR/Common Equity Tier I Ratio, Net NPA Ratio, and Tier I Leverage Ratio respectively. A breach of any risk threshold may result in the invocation of PCA.

Objectives of PCA framework
• 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.
•  Effective tool to ensure market discipline.

What are the reasons for expanding PCA framework to govt. owned NBFC’s?
• The NBFCs have been growing in size and have substantial interconnectedness with other segments of the financial system.
• In 2022, the RBI introduced the PCA framework for NBFCs to strengthen supervisory tools. The objective is to facilitate timely supervisory intervention and mandate corrective actions to restore financial health.
• The framework serves as a mechanism for effective market discipline, ensuring that NBFCs adhere to financial prudence