Tuesday, April 20

RBI issues draft circular on liquidity risk management for NBFCs

The Reserve Bank of India today issued a draft circular on liquidity risk management for NBFCs.

“The circular on the ‘Liquidity Risk Management Framework for Non-Banking Financial Companies (NBFCs) and Core Investment Companies (CICs)’ to be adopted by all deposit taking NBFCs; non-deposit taking NBFCs with an asset size of Rs 100 crore and above; and all CICs registered with the Reserve Bank,” RBI said in a press release.

While some of the current regulatory prescriptions applicable to NBFCs have been updated, certain new features have been added, the release added.

The draft proposes to introduce Liquidity Coverage Ratio (LCR) for all deposit taking NBFCs; and non-deposit taking NBFCs with an asset size of Rs 5000 crore and above.

The draft has been put up for public comments and stakeholders can send their comments on the same by June 14, 2019 to RBI.

As per reports, RBI said it is not in favour of providing special credit window to the NBFC sector to tide over the liquidity crunch.

Many NBFCs, including DHFL and Indiabulls Finance, came under severe liquidity pressure compelling them to bring down their reliance on commercial papers.

Ever since the IL&FS crisis erupted, banks have been averse to lending to the sector, which has put them in a tight spot. There are concerns that NBFCs may run out of money, which will lead to defaults.

Highlights of the draft:

  • It will be the responsibility of the Board of each NBFC to ensure that the guidelines are adhered to. The internal controls required to be put in place by NBFCs as per these guidelines shall be subject to supervisory review.

  • The draft prescribes additional disclosure standards including liquidity risk monitoring tools, adoption of stock approach to liquidity.

  • RBI has also proposed NBFCs to have enough liquidity for 30 days. As per the draft, LCR requirement of 60% will be binding on NBFCs from April 1, 2020 and it will gradually increase to 100% by 2024.

  • The stock of HQLA to be maintained by the NBFCs shall be minimum of 100% of total net cash outflows over the next 30 calendar days, the draft says.

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