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NBFCs now come under liquidity coverage rules

RBI has mandated NBFCs to monitor liquidity risk based on a “stock” approach to liquidity.

ET Bureau|
Nov 05, 2019, 10.42 AM IST
The Reserve Bank of India has extended its liquidity coverage rules to all deposit-taking non-banking finance companies (NBFCs), large nonbanks, and systemically important core investment companies to prevent a funds squeeze in the financial system.

“All non-deposit taking NBFCs with asset size of ₹100 crore and above, 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…,” the central bank said in a note. The regulator has exempted the non-operating financial holding companies from the liquidity framework.

The 1-30 day time bucket (for payments) in the statement of structural liquidity is segregated into multiple buckets of one-seven days, eight-14 days, and 15-30 days.

The above granularity in the time buckets would also be applicable to the interest rate sensitivity statement required to be submitted by NBFCs, the central bank said. NBFCs are expected to monitor their cumulative mismatches (running total) across all other time buckets up to one year by establishing internal prudential limits with the approval of their respective boards.

The net cumulative negative mismatches between payments and receivables in the maturity buckets of 1-7 days, 8-14 days, and 15-30 days shall not exceed 10-20 per cent of the cumulative cash outflows in the respective time buckets, RBI said.

The RBI has mandated NBFCs to also monitor liquidity risk based on a “stock” approach to liquidity. “The monitoring shall be by way of predefined internal limits as decided by the board for various critical ratios pertaining to liquidity risk,” it said. Indicative liquidity ratios are short-term liabilities to total assets, short-term liabilities to longterm assets, commercial papers to total assets, non-convertible debentures (NCDs) (original maturity less than one year) to total assets.

RBI also advised extending relevant principles to cover other aspects of monitoring and measurement of liquidity risk, viz., off-balance sheet and contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position management, and contingency funding plan.

In line with banks, RBI earlier introduced Liquidity Coverage Ratio (LCR), a measure aimed at maintaining enough cash with an NBFC. “All non-deposit taking NBFCs with asset size of ₹10,000 crore and above, and all deposit taking NBFCs irrespective of their asset size, shall maintain a liquidity buffer in terms of LCR,” RBI said.

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