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NBFC PCA to bring parity between banks, non-banks: Ind-Ra
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SME Times News Bureau | 19 Dec, 2021
The prompt corrective action (PCA) framework for non-banking financial
companies (NBFCs) will bring a further parity in terms of the
regulations between banks and non-banks, said India Ratings and Research
(Ind-Ra).
Accordingly, the ratings agency cited that the trend
will be supported on the back of increased size and scale of NBFCs and
interconnectedness with banks, along with the scale-based regulation
implemented in October 2021 and the alignment of asset quality
classifications implemented in November 2021.
Recently, the
Reserve Bank of India introduced the PCA framework for NBFCs and it will
come into effect from October 1, 2022, based on the financial position
of NBFCs on or after March 31, 2022.
"It also establishes a
regulatory course of action in an event of a breach of certain
parameters, thus acting as an early warning signal."
"In case of
any breach, the NBFCa¿s performance will be measured over four
consecutive quarters on risk threshold parameters to declassify the NBFC
placed under PCA."
As per Ind-Ra, NBFCs breaching any of the
risk threshold have time to course correct till March 2022 as the
guidelines will be based on year-end numbers.
"NBFCs with net
non-performing assets of 6 per cent and higher may have to make higher
provisions or sell assets to asset reconstruction companies during
2HFY22 to bring in the ratio outside the threshold, in line with the
guidance."
"This may impact profitability and capital buffers."
As of now, the agency said most of the large NBFCs are comfortably poised to comply with the regulations.
"Many
NBFCs have raised capital before and during pandemic, leading to an
improvement in their capital buffers, and carried excess expected credit
loss provisions to navigate the pandemic impact on asset quality."
"However,
any increase in the asset quality challenges in form of slippage from
the restructured book and book benefitted through 'Emergency Credit
Linked Guarantee Schemes' will led to NBFCs turning cautious in terms of
increasing provisions to maintain the risk threshold within the
permitted limits on the asset quality side."
According to Ind-Ra,
this PCA framework will bring greater clarity in terms of the
regulator's approach on NBFCs breaching threshold limits on capital
buffers or facing heightened credit risk.
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