The Reserve Bank of India (RBI) announced on Tuesday its intent to further regulate state-owned non-banking finance companies (NBFCs) through the prompt corrective action (PCA) framework starting October 1, 2024. The move, which excludes Base Layer entities, is set to affect prominent state-owned NBFCs such as India Infrastructure Finance Co (IIFCL), Power Finance Corp, and REC.
One of the companies under the spotlight, IIFCL, has been a prominent player in the Financial Services industry, according to InvestingPro Tips. With a market cap of $2906.56M USD and a P/E Ratio of 15.12, the company has been experiencing a steady growth, with a 19.81% revenue growth and a gross profit margin of 99.66% as of LTM2024.Q1, according to InvestingPro Data.
The PCA framework, first implemented on December 14, 2021, is designed to ensure early supervisory intervention and require supervised entities to implement timely remedial actions. RBI’s decision to extend these regulations to government-owned NBFCs is due to the systemic importance of these lenders, which have significant interconnectedness within the financial system.
Under the PCA framework, financial institutions face restrictions on dividend distribution/remittance of profits, equity infusion by promoters/shareholders, and issuing guarantees for group companies. For companies like IIFCL, this could affect their dividend growth, which has experienced a 14.29% increase as of LTM2024.Q1, as per InvestingPro Data. The company has also consistently increased its earnings per share and maintained dividend payments for 8 consecutive years, as per InvestingPro Tips.
The main goal of these stricter norms is to restore and enhance the financial health of these institutions. The RBI will assess the financial health of these entities based on their audited financials as of March 31, 2024. This follows an earlier deadline set by the RBI of March 31, 2022 for struggling state-owned NBFCs to adhere to capital adequacy norms – a ratio of capital to risk-weighted assets, considered as a crucial indicator of a bank’s financial strength.
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