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RBI draft liquidity framework guidelines for NBFCs

Date: 25 May 2019 Tags: Banking Laws & Regulations

Reserve Bank of India (RBI) has released draft circular on “Liquidity Risk Management Framework for NBFCs and Core Investment Companies (CICs)” for public comments. It proposes set of guidelines for large Non-Banking Financial Companies (NBFCs) to help them deal with severe liquidity problems and prevent re-occurrence of IL&FS type of debt crisis.

Recent circular:

Coverage: This draft, once finalised, needs 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.

Features of Framework

Liquidity Coverage Ratio (LCR) regime: It has been proposed in all deposit-taking NBFCs and non-deposit taking shadow banks with asset size of Rs.5,000 crore and above.

Implementation: It will be implemented in phased manner for smooth transition to LCR regime. The implementation will be done in calibrated manner by glide path over a period of 4 years starting from April 2020 and till April 2024.

Binding Condition: LCR requirement will be binding on NBFCs from 1 April 2020 with minimum LCR of 60% that will be progressively increased in equal steps till it reaches required level of 100% by April 1, 2024.

High Quality Liquid Assets (HQLA): NBFCs should maintain adequate level of unencumbered (free from debt) HQLA.  Its purposed is to convert it into cash so as to meet its liquidity needs for a 30 calendar-day time horizon in case of  significantly severe liquidity stress scenario. HQLA means liquid assets that can be immediately converted into cash or readily sold at very little or no loss of value or either used as collateral to obtain funds in a range of stress scenarios.

Background

NBFCs play important role in delivering credit to last mile, including retail as well as MSME sectors. However, in recent times many NBFCs have come under severe liquidity pressure ever since  IL&FS crisis, 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 further cycle of defaults. In above context, RBI has released a draft circular on this framework.