RBI issues corrective action for shadow banks

The central banks said PCA framework will be triggered if the net non-performing assets ratio is greater than 6% but less than or equal to 9%

The Reserve Bank of India Tuesday issued prompt corrective action framework for large non-banking finance companies aiming at strengthening supervisory mechanism over shadow banks that includes limiting their exposure to bad loans unless their asset shows improvement.

The framework that comes on the back of a series of payment defaults by NBFCs, will be applicable on all deposit-taking NBFCs except the government companies. The PCA framework will come into effect from October 1 next year.

The central bank has defined three risk thresholds for applying PCA to NBFCs. The most important is with regard to their asset quality.

The central banks said PCA framework will be triggered if the net non-performing assets ratio is greater than 6 per cent but less than or equal to 9 per cent. Secondly, if the capital adequacy falls more than 600 basis points from the regulatory minimum, or tier-1 capital falls more than 400 basis points below the minimum. And, third, when the capital adequacy ratio of the NBFC falls below 300 basis points of the regulatory minimum of 15 per cent.

The NBFC will face varying degrees of PCA framework restrictions based on the threshold triggered. The corrective action will include restrictions on dividend distribution/remittance of profits and, restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies. In certain extreme cases, NBFCs will also be restricted from opening branches.

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