NBFCs may soon have PCA-like framework: Report

File image

Non-banking financial companies (NBFCs) may soon have a framework for asset quality similar to the prompt corrective action (PCA) that the Reserve Bank of India put in place for banks in 2018, a report in The Times of India has said.

The central bank also asked NBFCs to make provision for acquired loans that have a moratorium period, which is the time during which the borrower is not required to repay the loan, the report said. The framework would most likely cover the Top 50 large NBFCs in the country.

Former deputy RBI governor Viral Acharya was an advocate of PCA and had said its objective was to limit further losses and prevent erosion of bank capital, create a platform of stability for the bank, and in turn, set the stage for structural interventions to be implemented and pushed through.

Thus, as per the framework, banks cannot increase exposure to non-performing assets (NPAs) unless the asset shows improved finances. This same concept will be used to prevent unchecked evergreening of loans for NBFCs, especially in the face of the current crisis.

The framework would also look at providing regulatory arbitrage on the risks for banks that would take on stressed NBFC assets. The aim was to make NBFCs divert cash streams towards liquid risk-free assets, the report said.

In fact, RBI Governor Shaktikanta Das has said that the central bank was "ready to take regulatory action, without delay, to safeguard the financial stability of the economy, if required".

The central bank had in May said it would merge its banking and non-banking supervision departments and undertake lateral recruitment of consultants as part of a functional revamp aimed at improving efficiency in the area.

"With a view to strengthening the supervision and regulation of commercial banks, urban co-operative banks and NBFCs, the Board has decided to create a specialised supervisory and regulatory cadre within the RBI," a statement read.