RBI extends PCA framework to government-owned NBFCs

October 11, 2023

GS Paper III Indian Economy

Context:

Reserve Bank of India extends the PCA Framework to government Non-banking Financial Companies (NBFCs) (except those in base layer) with effect from October 1, 2024.

What is the PCA framework of RBI?

It is a system that the RBI imposes on banks showing signs of financial stress.
As per the revised PCA framework issued in 2017, banks were to be evaluated on capital, asset quality, profitability and leverage.

PCA Framework

What changes does the PCA Framework bring in for Banks?

PCA framework allows the RBI to place certain restrictions such as halting branch expansion and stopping dividend payment.

PCA Framework

It can cap a bank’s lending limit to one entity or sector.
Other corrective actions that can be imposed on banks include special audit, restructuring operations and activation of recovery plans.
Banks’ promoters can be asked to bring in new management.
The RBI can also supersede the bank’s board, under PCA framework.

Capital adequacy ratio: It governs the capital that a bank ought to hold as a percentage of its total assets.

Asset quality: Tells us what portion of the loans is unlikely to be paid back, reflected in the net non-performing asset ratio.

Leverage ratio: It shows how much a lender has stretched itself in borrowing funds to generate income. The more the leverage, the riskier the turf on which the lender stands.

Attempt the PY Prelims Question

Pradhan Mantri MUDRA Yojana is aimed at;

Bringing the small entrepreneurs into formal financial system
Providing loans to poor farmers for cultivating particular crops
Providing pensions to old and destitute persons
Funding the voluntary organizations involved in the promotion of skill development and employment generation

Ans: A

News Source: The Hindu