The Reserve Bank of India (RBI) has released draft guidelines on Liquidity Risk Management Framework for non-banking financial companies (NBFCs) and core investment companies (CICs). The RBI has invited stakeholder comments on draft by June 14.
- Due to IL&FS crisis banks have been reluctant in lending to this NBFCs sector. There are rising concerns that NBFCs may run out of money, which will further lead to defaults.
- Large NBFCs such as DHFL and Indiabulls Finance came under severe liquidity pressure which compelled them to bring down their reliance on commercial papers (CPs). The CPs is a debt instruments which is issued by companies to raise funds for a time period of up to 1 year.
- RBI also announced to create special cadre to supervise and regulate financial institutions, including banks and NBFCs.
Need For the Draft
- To help large Non-Banking Financial Companies (NBFCs) to deal with severe liquidity problems.
- Preventing re-occurrence of IL&FS type of debt crisis.
Major Highlights of Draft
Liquidity Coverage Ratio (LCR)
- RBI will introduce an LCR regime in all deposit-taking NBFCs and non-deposit taking shadow banks with an asset size of Rs.5,000 crore and above in a phased manner. LCR will be also applicable on non-bank financial intermediaries that provide services similar to traditional commercial banks but are not subject to regulatory oversight.
- Implementation will be done with minimum LCR of 60% that will be progressively increased in equal steps till it reaches required level of 100% in next 4 years starting from April 2020 and till April 2024.
- An NBFC shall maintain an adequate level of unencumbered (free from debt) High Quality Liquid Assets (HQLA) under which a significantly severe liquidity stress scenario can be converted into cash to meet its liquidity needs for a 30 calendar-day time.
Asset-Liability Management Committee (ALCO)
- An ALCO will be formed consisting of NBFCs top management responsible for ensuring adherence to risk tolerance and limits set by Board and for implementing NBFCs liquidity risk management strategy.
- NBFC’s will formulate Contingency Funding Plan (CFP) for responding severe disruptions which may affect NBFC’s ability for funding in a timely manner and at a reasonable cost.