RBI proposes guidelines for NBFCs to help them deal with liquidity crisis

27 May 2019 Evaluate

In order to help ailing Non-Banking Financial Companies (NBFCs) deal with liquidity crisis, the Reserve Bank of India has proposed a set of guidelines for large NBFCs. The proposed norms are for helping NBFCs deal with severe liquidity problems and prevent re-occurrence of IL&FS type of debt crisis. According to proposal, a Liquidity Coverage Ratio (LCR) regime would be introduced 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. The RBI has released a draft circular on the 'Liquidity Risk Management Framework for NBFCs and Core Investment Companies (CICs).

With a view to ensuring a smooth transition to the LCR regime, the proposal is to implement it in a calibrated manner through a glide path over a period of four years commencing April 2020 and up to April 2024. The draft said the LCR requirement would be binding on NBFCs from April 01, 2020, with the minimum LCR to be 60 per cent, progressively increasing in equal steps till it reaches the required level of 100 per cent, by April 1, 2024.

The draft said An NBFC shall maintain an adequate level of unencumbered HQLA (High Quality Liquid Assets) that can be converted into cash to meet its liquidity needs for a 30 calendar-day time horizon under a significantly severe liquidity stress scenario. 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.

The RBI further proposed that Asset-Liability Management Committee (ALCO) consisting of the NBFC's top management should be responsible for ensuring adherence to the risk tolerance/limits set by the Board as well as implementing the liquidity risk management strategy of the NBFC. The draft guidelines also cover application of generic asset liability management (ALM) principles, granular maturity buckets in the liquidity statements and tolerance limits, liquidity risk monitoring tool and adoption of the 'stock' approach to liquidity.

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