With a view to enable supervisory intervention at the appropriate time and to require the supervised entity to initiate and implement remedial measures in a timely manner so as to restore its financial health, the RBI, on December 14, 2021, introduced the Prompt Corrective Action Framework (‘PCA Framework’) for NBFCs, effective from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022, as a tool for effective market discipline.

The PCA Framework is applicable to all deposit-taking NBFCs (excluding Government companies) and all non-deposit taking NBFCs in middle, upper and top layers (including investment and credit companies, core investment companies, infrastructure debt funds, infrastructure finance companies, micro finance institutions and factors but excluding NBFCs not accepting or not intending to accept public funds, Government companies, primary dealers and housing finance companies).

An NBFC is placed under the PCA Framework based on the audited financial results of such NBFC in case of a breach of a prescribed risk threshold (which varies depending on the type of NBFC) and/or the supervisory assessment made by the RBI. However, if the circumstances so warrant, the RBI may place an NBFC under the PCA Framework during the course of the year as well.

Upon such placement and depending on which prescribed risk threshold has been breached, certain corrective actions (including certain mandatory corrective actions as prescribed under the PCA Framework) are to be taken by the NBFC.