NBFC Liquidity Norms

• 05 Nov 2019

The Reserve Bank of India (RBI) has introduced ‘liquidity management framework’ for Non-Banking Financial Companies (NBFCs).

• The RBI move has come following liquidity crunch among some NBFCs in meeting their recent repayment obligations after the collapse of the Infrastructure Leasing and Financial Services (IL&FS) group.

Key Points

• Liquidity Coverage Ratio
  
  • All non-deposit taking NBFCs (NBFC-NDs) with asset size of Rs 10,000 crore and above and all deposit-taking NBFCs have to maintain a liquidity buffer in terms of Liquidity Coverage Ratio (LCR).
    
    • However Type I - NBFC-ND entities are exempt from the applicability of LCR norms.
    • Type I - NBFC-ND entities are those which do not accept public funds and do not have customer interface and do not intend to engage in such activities.

Note

• LCR refers to the proportion of highly liquid assets held by companies to ensure their ongoing ability to meet short-term obligations.
• It 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.
• HQLAs mean 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.

• The LCR requirement will be binding on NBFCs from 1^st December, 2020 with the minimum HQLAs to be held being 50% of the LCR, progressively reaching up to the level of 100% by 1st December, 2024.
• Assets to be included as HQLA include cash, government securities and marketable securities issued or guaranteed by foreign sovereigns. These assets should be free of any financial liability.
• Significance: The presence of liquid reserve will prevent a NBFC from going into a default loss if some inflows get delayed.

• NBFCs should adopt liquidity risk monitoring tools and metrics in order to capture strains in liquidity position.

Source: IE