RBI proposes liquidity risk management framework for NBFCs

The framework prescribes a Liquidity Coverage Ratio (LCR) for all deposit taking non-banking finance companies (NBFCs) and all non-deposit taking NBFCs with an asset size of Rs5,000 crore and above.

RBI proposes to implement the proposal in a calibrated manner through a glide path over a period of four years commencing from April 2020 and going up to April 2024, with a view to ensuring a smooth transition to the LCR regime.

While framing the new guidelines, RBI has updated / recast and added certain new features in the current regulatory prescriptions applicable to NBFCs on asset-liquidity management (ALM) framework. 

Among others, the draft guidelines cover application of generic ALM principles, granular maturity buckets in the liquidity statements and tolerance limits, liquidity risk monitoring tool and adoption of the “stock” approach to liquidity.

RBI said these measures will promote resilience of NBFCs to potential liquidity disruptions by ensuring they have sufficient High-Quality Liquid Asset (HQLA) to survive any acute liquidity stress scenario lasting for 30 days.

High-Quality Liquid Assets (HQLA) means liquid assets that can be readily sold or immediately converted into cash at little or no loss of value or used as collateral to obtain funds in a range of stress scenarios.

Non-Banking Financial Companies (NBFCs) play an important role in the financial system of the country, particularly in delivering credit to the last mile, including the retail as well as MSME sectors. NBFCs’ ability to perform their role effectively and efficiently requires them to be financially resilient, well-regulated and properly governed so that they retain the confidence of all their stakeholders including their lenders and borrowers, RBI noted. 

RBI said the new guidelines are intended to provide and modulate a regulatory architecture consistent with the need for a stronger asset liability management (ALM) framework in the NBFCs.

The new `Liquidity Risk Management Framework for Non-Banking Financial Companies (NBFCs) and Core Investment Companies (CICs)’ are to be adopted by all deposit taking NBFCs, non-deposit taking NBFCs with an asset size of Rs100 crore and above and all CICs registered with the Reserve Bank.

RBI has sought public comments on the draft framework for consideration before issuing the final guidelines. Responses of NBFCs, market participants and other stakeholders may be sent latest by 14 June 2019.