The prompt corrective action (PCA) framework for non-banking financial companies (NBFCs) will bring a further parity in terms of the regulations between banks and non-banks, said India Ratings and Research (Ind-Ra).
Accordingly, the ratings agency cited that the trend will be supported on the back of increased size and scale of NBFCs and interconnectedness with banks, along with the scale-based regulation implemented in October 2021 and the alignment of asset quality classifications implemented in November 2021.
Recently, the Reserve Bank of India introduced the PCA framework for NBFCs and it will come into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022.
“It also establishes a regulatory course of action in an event of a breach of certain parameters, thus acting as an early warning signal.”
“In case of any breach, the NBFCas performance will be measured over four consecutive quarters on risk threshold parameters to declassify the NBFC placed under PCA.”
As per Ind-Ra, NBFCs breaching any of the risk thresholds have time to course-correct till March 2022 as the guidelines will be based on year-end numbers.
“NBFCs with net non-performing assets of 6 per cent and higher may have to make higher provisions or sell assets to asset reconstruction companies during 2HFY22 to bring in the ratio outside the threshold, in line with the guidance.”
“This may impact profitability and capital buffers.”
As of now, the agency said most of the large NBFCs are comfortably poised to comply with the regulations.
“Many NBFCs have raised capital before and during pandemic, leading to an improvement in their capital buffers, and carried excess expected credit loss provisions to navigate the pandemic impact on asset quality.”
“However, any increase in the asset quality challenges in form of slippage from the restructured book and book benefitted through ‘Emergency Credit Linked Guarantee Schemes’ will led to NBFCs turning cautious in terms of increasing provisions to maintain the risk threshold within the permitted limits on the asset quality side.”
According to Ind-Ra, this PCA framework will bring greater clarity in terms of the regulator’s approach on NBFCs breaching threshold limits on capital buffers or facing heightened credit risk.