November 5, 2019 1:00:11 am
At a time when the financial sector is roiled by liquidity management issues, the Reserve Bank of India (RBI) has asked all non-deposit taking non-banking financial companies (NBFC-NDs) with asset size of Rs 10,000 crore and above and all deposit-taking non-banking financial companies (NBFCs) irrespective of their asset size to maintain a liquidity buffer in terms of liquidity coverage ratio (LCR). LCR refers to the proportion of highly liquid assets held by companies to ensure their ongoing ability to meet short-term obligations.
LCR will promote resilience of NBFCs to potential liquidity disruptions by ensuring that they have sufficient high quality liquid asset (HQLA) to survive any acute liquidity stress scenario lasting for 30 days, the central bank said.
Eye on preventing potential systemic risk
The RBI has brought NBFCs under the LCR to prevent any potential systemic risk in the future as the IL&FS collapse and the crisis-hit DHFL had put the financial sector into a turmoil. Now NBFCs will have to keep high quality assets like cash, government securities and marketable securities issued or guaranteed by foreign sovereigns as a buffer to tackle any risk or shock. These assets can be readily sold or used as collateral to obtain funds in a range of stress scenarios and bring the situation control in the future. However, the RBI seems to have shut the stable door after the horses have bolted.
In its guidelines for the asset liability management (ALM) framework of NBFCs, the RBI said the stock of HQLA to be maintained by the NBFCs should be a minimum of 100 per cent of total net cash outflows over the next 30 calendar days. “The LCR requirement shall be binding on NBFCs from December 1, 2020 with the minimum HQLAs to be held being 50 per cent of the LCR, progressively reaching up to the required level of 100 per cent by December 1, 2024,” the RBI said.
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Further, all non-deposit taking NBFCs with asset size of Rs 5,000 crore and above but less than Rs 10,000 crore should also maintain the required level of LCR starting December 1, 2020, and up to 100 per cent by December 1, 2024.
The RBI move follows liquidity crunch among some NBFCs in meeting their recent repayment obligations after the collapse of the Infrastructure Leasing and Financial Services (IL&FS) group.
According to the RBI, assets to be included as HQLA without any haircut include cash, government securities and marketable securities issued or guaranteed by foreign sovereigns.
Liquid assets comprise of high quality assets that can be readily sold or used as collateral to obtain funds in a range of stress scenarios.
“They shall be unencumbered. Assets are considered to be high quality liquid assets if they can be easily and immediately converted into cash at little or no loss of value.
“The liquidity of an asset depends on the underlying stress scenario, the volume to be monetized and the timeframe considered,” the RBI said.
All non-deposit taking NBFCs with asset size of Rs 100 crore and above, systemically important core investment companies and all deposit taking NBFCs irrespective of their asset size, should adhere to the set of liquidity risk management guidelines, the RBI said. However, these guidelines will not apply to Type 1 NBFC-NDs, non-operating financial holding companies and standalone primary dealers, it added.
“It will be the responsibility of the board of each NBFC to ensure that the guidelines are adhered to. The internal controls required to be put in place by NBFCs as per these guidelines should be subject to supervisory review,” it said.
Further, as a matter of prudence, all other NBFCs are also encouraged to adopt these guidelines on liquidity risk management on a voluntary basis, the RBI added.
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