Prompt Corrective Action Framework: Reserve Bank of India (RBI) extends applicability to Government NBFCs as well

The RBI through a recent circular has decided the applicability of its Prompt Corrective Action Framework (PCAF) to even include and apply to Government NBFCs (excluding those in the Base Layer). The PCAF will be applicable to Government NBFCs with take effect from October 1, 2024, based on the audited financials as of March 31, 2024, or thereafter.
 
The RBI introduced the PCAF in 2002 as a systematic early-intervention tool for banks facing undercapitalization stemming from deteriorating asset quality or vulnerability resulting from declining profitability. Consequently, the PCAF assists the RBI in monitoring and addressing the escalating issue of Non-Performing Assets (NPAs) within the banking sector.
 
While the objective of the PCAF 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, it does not preclude the RBI from taking action as and when it deems fit.
 
Prior to November 02, 2021, the PCAF only applied to Commercial Banks. However, the RBI later expanded its scope to encompass Scheduled Commercial Banks, with the exception of Small Finance Banks, Payment Banks, and Regional Rural Banks. Additionally, the RBI extended its coverage to include Non-Banking Financial Companies (NBFCs) through a circular dated December 14, 2021.
 
The inclusion of NBFCs was motivated by their significant growth and extensive interconnections within the broader financial system. However, it’s worth noting that the RBI by way of its circular dated December 14, 2021, explicitly excluded Government NBFCs from its scope. This circular applied to all deposit-taking NBFCs and non-deposit-taking NBFCs across the middle, upper, and top tiers, including Investment and Credit Companies, Core Investment Companies (CICs), Infrastructure Debt Funds, Infrastructure Finance Companies, Micro Finance Institutions, and Factors.
 
Subsequently, the RBI conducted a review of this framework, and decided, to extend the same to Government NBFCs by way its circular dated October 10, 2023.
 
A copy of the recent RBI Circular extending applicability of PCAF on Government NBFCs is enclosed below.
 
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