NBFCs will have to maintain minimum high quality liquid assets of 100 per cent of total net cash outflows over the following 30 days.
Mumbai: The Reserve Bank of India (RBI) on Friday released draft norms proposing to introduce liquidity coverage ratio (LCR) for all deposit taking and non-deposit taking NBFCs with an asset size of Rs 5,000 crore and above. The central bank said it planned to implement LCR, a liquidity buffer, "in a calibrated manner" over four years starting from April 2020.
In the draft circular titled “Liquidity Risk Manage-ment Framework for Non-Banking Financial Compa-nies and Core Investment Companies” the RBI covered the 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. However, experts pointed out that while the liability profile of non-banking finance companies (NBFCs) is different from banks, but the norms being proposed for NBFCs are similar to what is being followed by banks.
The draft framework is applicable to all non-deposit taking NBFCs with an asset size of over Rs 100 crore and all core investment companies (CICs) registered with the RBI, while the LCR requirement is only for those having an asset size of Rs 5,000 crore and above. NBFCs will have to maintain minimum high quality liquid assets of 100 per cent of total net cash outflows over the following 30 days.
According to new RBI guidelines, the board of NBFCs has to frame a liquidity risk management framework that ensures sufficient liquidity is maintained and should have the overall responsibility for the management of liquidity risk. Further, NBFCs should formulate a contingency funding plan (CFP) for responding to severe disruptions; publicly disclose information on a regular basis on liquidity risk, top 20 large deposits, top 10 borrowings and funding concentration.
Anil Gupta, Sector Head, Financial Sector Ratings at Icra, said quarterly disclosure of the liability profile and the top providers is positive and will provide investors an insight on liability concentration risk and improve the liability management of NBFCs.