Date : 15 Dec 2021
PCA framework for large NBFCsTags :
Why in News?
- The Reserve Bank of India (RBI) on Tuesday released a prompt corrective action (PCA) framework for non-banking finance companies (NBFCs) detailing punitive action against shadow lenders in case their capital adequacy ratio falls or non-performing assets (NPAs) rise above a certain threshold.
- The new framework, the first of its kind for NBFCs will come into effect from October, 2022.
- The central bank's action comes after multiple jolts to the financial system in the last three years starting with the collapse of IL&FS in September 2018.
- The collapse of IL&FS has been followed by the bankruptcy of Dewan Housing Finance Ltd (DHFL) in 2019 and the Kolkata-based Srei Group and Anil Ambani controlled Reliance Capital this year.
What is PCA?
- Prompt Corrective Action Framework refers to the central bank’s watchlist of weak banks.
- The regulator imposes restrictions like curbs on lending on such banks.
- The PCA Framework is also intended to act as a tool for effective market discipline.
What will a bank do if PCA is triggered?
- Banks are not allowed to renew or access costly deposits or take steps to increase their fee-based income.
- Banks will also have to launch a special drive to reduce the stock of NPAs and contain the generation of fresh NPAs.
- They will also not be allowed to enter into new lines of business.
- RBI will also impose restrictions on the bank on borrowings from the interbank market.
What is NBFC?
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of the immovable property.
- A non-banking institution that is a company and has the principal business of receiving deposits under any scheme or arrangement in one lump sum or installments by way of contributions or in any other manner.
What is the difference between banks & NBFCs?
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.
- NBFCs are not permitted to issue debit cards, smart cards, stored value cards, charge cards, etc.
- NBFCs are not allowed to undertake credit card business without prior approval of the Reserve Bank of India.
Sources: RBI.org, Vikaspedia, PIB