RBI notification: Liquidity coverage ratio for NBFCs mandated

RBI notification: Liquidity coverage ratio for NBFCs mandated

The Reserve Bank of India  on Monday issued final guidelines on the liquidity risk management framework for non-banking financial companies (NBFCs) and core investment companies (CICs), updating some existing features on asset liability management (ALM) and introducing liquidity coverage ratio (LCR) for NBFCs with assets of Rs 10,000 crore and above.

The final guidelines postpone the start date of implementation of the LCR norm to December 1, 2020 from April 1, 2020 in the draft guidelines issued in May, and lower the level of high-quality liquid assets (HQLAs) to be initially maintained as a share of LCR to 50% from 60% for non-banks with asset books of Rs 10,000 crore and above. For non-deposit-taking NBFCs with asset book sizes ranging between `5,000 crore and `10,000 crore, the minimum LCR requirement will be 30% by December 1, 2020 and go up in a staggered manner to 100% by December 1, 2024.

“In order to strengthen and lift the quality of ALM framework applicable to NBFCs, it has been decided to revise the extant guidelines on liquidity risk management for NBFCs,” the central bank said in a notification. “All non-deposit-taking NBFCs with quality size of `100 large integer and on top of, systemically important core investment companies and all deposit-taking NBFCs irrespective of their asset size, shall adhere to the set of liquidity risk management guidelines given below.”

All non-deposit-taking NBFCs with quality size of Rs 10,000 crore and above and all deposit-taking NBFCs irrespective of their asset size will have to maintain a liquidity buffer in terms of an LCR, which is able to promote resilience of NBFCs to potential liquidity disruptions by making certain that they need adequate high-quality quick assets (HQLA) to survive any acute liquidity stress state of affairs lasting for 30 days. The stock of HQLA to be maintained by NBFCs shall be a minimum of 100% of total net cash outflows over the next 30 calendar days.

The 1-30 day time bucket in the statement of structural liquidity is segregated into granular buckets of 1-7 days, 8-14 days and 15-30 days. The net accumulative negative mismatches within the maturity buckets of 1-7 days, 8-14 days, and 15-30 days should not exceed 10%, 10% and 20% of the cumulative cash outflows in the respective time buckets, the RBI said.

“NBFCs, however, area unit expected to observe their accumulative mismatches (running total) across all alternative time buckets up to at least one year by establishing internal prudent limits with the approval of the board. The above granularity in the time buckets would also be applicable to the interest rate-sensitivity statement required to be submitted by NBFCs,” the notification stated.

NBFCs can got to adopt liquidity risk observation tools or metrics so as to capture strains in liquidity position. Such monitoring tools should cover concentration of funding by counterparty/instrument/currency, availability of unencumbered assets that can be used as collateral for raising funds, and certain early-warning market-based indicators, such as price-to-book ratio, coupon on debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements. The boards of NBFCs should put in place necessary internal monitoring mechanism in this regard, the guidelines said.