For non-banking financial enterprises, the Reserve Bank of India (RBI) has established the quick corrective action (PCA) framework (NBFCs). The central bank has set three risk criteria for NBFCs to be subjected to immediate remedial action. On November 2, 2021, the updated Prompt Corrective Action (PCA) Framework for Scheduled Commercial Banks (SCBs) was published. "NBFCs have been expanding in size and are highly interconnected with other financial system segments. As a result, a PCA framework for NBFCs has been established to improve the supervisory tools available to NBFCs "In a statement, the RBI said. All deposit-taking NBFCs in the middle, upper, and top levels will be subject to the new NBFC framework.

The RBI's release of the PCA framework for NBFCs, according to Jaya Vaidhyanathan, CEO of BCT Digital, which focuses on risk management and regulatory needs of banks and NBFCs, is a welcome move.

"Due to their low supervision compared to banks, shadow banking or lending companies outside the banking system have been under scrutiny globally for possible credit abuses. Despite the fact that NBFCs are regulated more laxly than banks, recent events like as IL&FS, DHFL, and many more in China have made regulators understand that checks and balances are necessary.

Especially since NBFCs frequently borrow from banks and then lend to customers whom banks may be unwilling to finance." According to RBI, the PCA framework for NBFCs will take effect on October 1, 2022, and will be based on the financial situation of NBFCs on or after March 31, 2022. After three years of operation, the same will be evaluated. In 2002, the RBI introduced a PCA framework for scheduled commercial banks, which has been reviewed on a regular basis based on experience and changes in the banking industry.

The PCA framework's goal is to allow for timely supervisory intervention and to oblige the supervised company to initiate and implement remedial measures in order to restore its financial health. The PCA framework is also meant to be used as a market discipline tool. It does not preclude the RBI from taking any further action it sees fit, in addition to the corrective actions outlined in the framework, at any time.

The RBI has tightened NBFC NPA recognition rules, putting them in line with banks. The PCA framework, which was previously only available to banks, has now been extended to NBFCs. Paying dividends, adding branches, and CAPEX are all restricted for lenders who exhibit deterioration in performance measures like as capital, asset quality, and leverage. Restrictions could be imposed based on the severity of the problem, with more inspection applied until the situation improves. This is a positive step since it will prevent bad lenders from getting worse rather than ignoring the problem.

Finally, because NBFCs are now more intimately connected with the banking system than they have ever been, safer NBFCs imply a safer overall financial system. Jaya Vaidhyanathan went on to say more.