The Reserve Bank of India (RBI) on May 24 said all non-deposit-taking non-banking financial companies (NBFCs) with an asset size of Rs 5,000 crore and above, and all deposit-taking NBFCs irrespective of their asset size, have to maintain a liquidity buffer in terms of a Liquidity Coverage Ratio (LCR).
In a draft on liquidity risk management framework for NBFCs and core investment companies, 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.
The banking regulator proposed that it will implement LCR through a glide path from April 1, 2020, to April 1, 2024.
“The LCR requirement shall be binding on NBFCs from April 1, 2020, with the minimum High-Quality Liquid Assets (HQLA) to be held being 60 percent of the LCR, progressively increasing in equal steps reaching up to the required level of 100 percent by April 1, 2024,” said the RBI draft.
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.
In the draft framework, the RBI has also proposed the introduction of various tools for effective liquidity management and monitoring of liquidity risk for NBFCs. The draft suggested setting up of a risk management committee, an asset-liability management committee and an asset-liability management support group in NBFCs.
A granular maturity bucket system has been proposed to keep a check on mismatches across tenures. Under new norms, the 1-30 days bucket would be bifurcated into 1-7 days, 8-14 days, and 15-30 days buckets. Also, NBFCs will need to monitor their cumulative mismatches (running total) across all other time buckets up to 1 year by establishing internal prudential limits with the approval of their boards.
The regulations for the shadow banking sector come in the wake of defaults and liquidity crisis that hit the NBFC sector last year. It had a contingent effect on the banking system raising the need for RBI to list out stricter norms for the sector.
In order to better monitor the banking system and NBFCs, the RBI on May 21, decided to merge its banking and non-banking supervision departments and hire a team of specialised staff to strengthen it.
Keki Mistry, Vice Chairman and CEO, HDFC told CNBC-TV18 said that the asset liability mismatch had become a concern after the IL&FS liquidity crisis.
"The IL&FS defaults created a panic in the market and because of that there has been no availability of funding for many of the NBFCs for the last seven to eight months. That nervousness in the market had to be eliminated and that is the reason why RBI has come out with this circular," he added.
The first signs of trouble in the IL&FS group emerged in June when it defaulted on inter-corporate deposits and commercial papers (borrowings) worth about Rs 450 crore. This was followed by a series of missed debt payments. IL&FS has a cumulative debt of Rs 91,000 crore.
Gagan Banga, Vice-Chairman and Managing Director, Indiabulls Housing Finance told CNBC-TV18 that it should not be difficult for large NBFCs to abide by the norms. He added that the RBI draft is a positive move and will help regulate the NBFC sector.
RBI also said it will revise norms on asset-liability management. Further, the draft said NBFCs should adopt liquidity risk monitoring tools in order to capture strains in liquidity position. These include off-balance sheet and contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position management, and contingency funding plan.
Stakeholders have been given time until June 14 to give their comments on the draft.