News:The Reserve Bank of India(RBI) has introduced ‘liquidity management framework’ for Non-Banking Financial Companies (NBFCs).
Why this framework?
- This framework is introduced due to liquidity crunch faced by some NBFCs after the collapse of the Infrastructure Leasing and Financial Services(IL&FS) group.
About the framework:
- The framework has introduced the liquidity coverage ratio(LCR) for Non-Banking Financial Companies (NBFCs).
- It says that all non deposit taking NBFCs with an asset size of ₹10,000 crore and above and all deposit taking NBFCs irrespective of their asset size have to maintain LCR at 50% starting from December 2020 which will be gradually increased to 100 per cent by December 2024.
- For all non deposit taking NBFCs with asset size between ₹5,000-10,000 crore,the LCR requirement will start at 30 per cent in December 2020 and reach 100 per cent by December 2024.
- However,these guidelines will not apply to Type 1 NBFC-NDs, non-operating financial holding companies and standalone primary dealers.
- 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.
About liquidity coverage ratio:
- LCR refers to the proportion of highly liquid assets held by companies to ensure their ongoing ability to meet short-term obligations.
- It promotes resilience of banks 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.
- An NBFC is a company registered under the Companies Act,1956.It engages in the business of (a)loans and advances (b)acquisition of shares /stocks/ bonds/ debentures/securities issued by Government or local authority or other marketable securities of a like nature leasing and (c)hire-purchase,insurance business,chit business.
- However,it does not include any institution whose principal business is that of (a)agriculture activity (b)industrial activity (c)purchase or sale of any goods (other than securities) and (d)providing any services and sale/purchase/construction of immovable property.