SIMPLIFYING PCA DIRECTIVES ISSUED BY RBI
Who are included?
1. All deposit taking NBFCs
2. All non-deposit taking NBFCs with asset size greater or equal to Rs 1,000 cr (includes Core Investment Companies, Infra Debt Funds, Infra Fin Cos, MFIs)
Who are excluded?
1. All non-deposit taking NBFCs with asset size less than Rs 1000 cr.
2. Housing Finance Companies
3. Government NBFCs (till they switch over to the revised min CRAR requirements of 15% by Mar’22).
4. PDs
What parameters will be tracked to invoke PCA norms?
1. NBFCS (D and ND): Capital to Risk Weighted Assets Ratio (CRAR), Tier I Capital Ratio and Net NPA Ratio (NNPA).
2. CICs: Adjusted Net Worth/Aggregate Risk Weighted Assets, Leverage Ratio and NNPA
What would be the periodicity of PCA review?
1.Typically, these would be based on annual statements, but RBI can at any time of the year demand a review based on evolving situation.
What is the risk threshold for invoking PCA?
1.NBFCs (D and ND):
Risk Threshold-1 | Risk Threshold-2 | Risk Threshold-3 | |
---|---|---|---|
CRAR | CRAR <15% to ≥ 12% | CRAR <12% but ≥9% | CRAR <9% |
Tier I Capital Ratio | Tier 1 Capital Ratio <10% but ≥ to 8% | T1 capital ratio <8% but ≥ to 6% | T1 capital ratio <6% |
NNPA Ratio (including NPIs) | >6% but ≤ 9% | >9% but ≤12% | >12% |
Risk Threshold-1 | Risk Threshold-2 | Risk Threshold-3 | |
---|---|---|---|
CRAR | CRAR <15% to ≥ 12% | CRAR <12% but ≥9% | CRAR <9% |
Tier I Capital Ratio | Tier 1 Capital Ratio <10% but ≥ to 8% | T1 capital ratio <8% but ≥ to 6% | T1 capital ratio <6% |
NNPA Ratio (including NPIs) | >6% but ≤ 9% | >9% but ≤12% | >12% |
2. CICs
Risk Threshold-1 | Risk Threshold-2 | Risk Threshold-3 | |
---|---|---|---|
Adjusted Net Worth / Aggregate Risk Weighted Assets | ANW/RWA <30% but ≥24% | ANW/RWA <24% but ≥18% | ANW/RWA <18% |
Leverage Ratio | ≥2.5 times but <3 times | ≥ 3 times but <3.5 times | ≥3.5 times |
NNPA Ratio (including NPIs) | >6% but ≤ 9% | >9% but ≤12% | >12% |
Risk Threshold-1 | Risk Threshold-2 | Risk Threshold-3 | |
---|---|---|---|
Adjusted Net Worth / Aggregate Risk Weighted Assets | ANW/RWA <30% but ≥24% | ANW/RWA <24% but ≥18% | ANW/RWA <18% |
Leverage Ratio | ≥2.5 times but <3 times | ≥ 3 times but <3.5 times | ≥3.5 times |
NNPA Ratio (including NPIs) | >6% but ≤ 9% | >9% but ≤12% | >12% |
What happens when a risk threshold is breached?
PCA norms will be activated. The intensity of measures will depend on the threshold breached (1/2/3).
Mandatory Actions | Discretionary Actions | |
---|---|---|
Risk Threshold 1 | - Restriction on dividend distribution/remittance of profits | Common menu |
- Promoters/shareholders to infuse equity and reduction in leverage | - Special Supervisory Actions | |
- Restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies (only for CICs) | - Strategy related | |
- Governance related | ||
Risk Threshold 2 | In addition to mandatory actions of Threshold 1 | - Capital related |
- Restriction on branch expansion | - Credit risk related | |
- Market risk related | ||
Risk Threshold 3 | In addition to mandatory actions of Threshold 1 & 2 | - HR related |
- Appropriate restrictions on capital expenditure, other than for technological upgradation within Board approved limits | - Profitability related | |
- Restrictions/reduction in variable operating costs | - Operations/Business related | |
Any other |
Mandatory Actions | Discretionary Actions | |
---|---|---|
Risk Threshold 1 | - Restriction on dividend distribution/remittance of profits | Common menu |
- Promoters/shareholders to infuse equity and reduction in leverage | - Special Supervisory Actions | |
- Restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies (only for CICs) | - Strategy related | |
- Governance related | ||
Risk Threshold 2 | In addition to mandatory actions of Threshold 1 | - Capital related |
- Restriction on branch expansion | - Credit risk related | |
- Market risk related | ||
Risk Threshold 3 | In addition to mandatory actions of Threshold 1 & 2 | - HR related |
- Appropriate restrictions on capital expenditure, other than for technological upgradation within Board approved limits | - Profitability related | |
- Restrictions/reduction in variable operating costs | - Operations/Business related | |
Any other |
When can an institution come out of PCA norms?
The following conditions needs to be met (as assessed by RBI):
When will these norms come into effect?
October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022.
Key terms:
Capital to Risk Weighted Assets Ratio (CRAR) = (Eligible Tier 1 and Tier 2 Capital Funds)/(Credit Risk RWA+ Market Risk RWA+ Operation Risk RWA)
Tier 1 Capital: Tier I capital consists mainly of share capital and disclosed reserves and it is a financial institution’s highest quality capital because it is fully available to cover losses.
Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held).
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Author: Debopam Chaudhuri, Head of Research and Ratings
+91-9819239926, dc@truboardpartners.com
Author: Debopam Chaudhuri
Head of Research and Ratings
+91-9819239926
dc@truboardpartners.com
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