The Reserve Bank of India (RBI) has released the draft circular on Liquidity Risk Management Framework for Non-Banking Financial Companies(NBFCs) and Core Investment Companies (CIC’s) for public comments.
The NBFCs play an important role in delivering credit to the last mile, including the retail as well as MSME sectors.
However,many NBFCs have come under severe liquidity pressure ever since the IL&FS crisis erupted, compelling them to stop deposit renewals and resort to high cost borrowings. There are concerns that NBFCs may run out of money, which will lead to defaults.In the above background,the RBI has released the draft circular.
This draft once finalised, needs to be adopted by all deposit taking NBFCs and non-deposit taking NBFCs with an asset size of ₹ 100 crore and above and all CICs registered with the Reserve Bank.
The draft says that the Liquidity Coverage Ratio(LCR) would be introduced in all deposit taking NBFCs and non-deposit taking NBFCs with an asset size of Rs 5,000 crore and above.
LCR is a requirement under Basel III whereby banks are required to hold an amount of high-quality liquid assets (HQLA) that’s enough to fund cash outflows for 30 days.
The draft also makes it mandatory for NBFCs to hold Government Securities in the form of high quality liquidity assets(HQLA).HQLA are liquid assets that can be readily sold or immediately converted into cash at little or no loss of value or can be used as collateral for borrowing purposes.
The circular says that board of all NBFCs with assets of more than 5,000 crore are required to ensure an (a)Asset liability management committee, (b)asset risk management committee and an (c)asset-liability management support group in NBFCs for implementing Liquidity risk mitigation policies.
Further,the draft says that NBFCs are required to formulate their Contingency Funding Plan as a liquidity crisis management tool that will help them with alternative sources of funding in liquidity crisis and will prevent over reliance on single source of funding.
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