Liquidity coverage ratio may not adversely impact growth of NBFCs

The Reserve Bank of India’s (RBI’s) move to ask non-banking financial companies (NBFCs) to maintain liquidity coverage ratio (LCR) may not have any adverse impact on their growth parameters, as most of them have already been carrying extra liquidity on balance sheets.
 
“Almost all the NBFCs have been keeping additional cash on their balance sheet because of the uncertainty. So these guidelines are not going to change much for any NBFC. We are already incurring the cost of keeping a liquidity buffer so there will be only marginal impact on the margins. If at all, some NBFCs who are very aggressive now have to be a bit cautious,” said chief executive officer (CEO) of a transport finance company.
 
Housing finance companies (HFCs) are also maintaining a liquidity buffer equivalent of 1-3 months of outflows on their balance sheets so that they can meet their debt obligations in a very tight liquidity scenario.
 
Deo Shankar Tripathi, CEO of Aadhar Housing Finance, said: “Most of HFCs have been keeping liquidity buffer equal to 1-3 months of outflow. This used to be kept in liquid mutual fund, bank fixed deposits (FDs), and bonds depending on their size. Now, the RBI has defined a proper frame work for liquidity coverage ratio, high quality liquid assets, and proportion of monthly inflow and outflow to be considered for liquidity coverage based on nature of inflow and outflow.”
 
“LCR will not impact profitability of HFCs that enough liquidity as negative carry on such buffer has already been factored in. The companies, which maintained less liquid assets, may have some negative carry, slightly impacting their earning,” he said.
 
The RBI introduced liquidity management framework for cash-strapped NBFCs wherein they have mandated non-deposit taking NBFCs with an asset size of Rs 10,000 crore and all deposit taking NBFCs irrespective of the asset size to maintain a liquidity buffer in terms of LCR from December 1, 2020. LCR is the proportion of high liquid assets set aside to meet short-term obligations.
 
Initially, NBFCs have to maintain a minimum of 50 per cent of high quality liquid assets as part of the LCR, which will progressively touch 100 per cent by December 2024. Similarly, for non-deposit taking NBFCs with an asset size of more than Rs 5,000 crore and less than Rs 10,000 crore, a minimum of 30 per cent will be of liquid assets as LCR is starting from December 2020. This (liquid assets) will eventually reach 100 per cent by 2024.
 
However, core investment companies, smaller NBFCs (non-deposit taking), non-operating financial holding companies and standalone primary dealers have been exempted from the LCR requirements.
 
The RBI has also specified the kind of assets that it wants NBFCs to hold as high quality liquid assets. Cash, government securities, and marketable securities issued or guaranteed by foreign sovereigns will attract no haircut while other forms of asset will attract varying haircuts. Industry experts believe with the move to introduce LCR for the NBFCs, the regulator is slowly moving closer towards the benchmarks in place for banks. 
 
According to Karthik Srinivasan, Senior Vice-President ICRA, “The RBI has been talking of increasing on-balance sheet liquidity of NBFCs. Now, they are basically saying one of the challenges have been that liquidity has become tight and like banks have been maintaining some sort of liquidity quotient, NBFCs need to maintain a liquidity quotient.” 
 
“Logically, it’s a good move but this will certainly put some pressure on growth. But I guess at this point in time it’s the availability of liquidity is the main concern and once the liquidity is there then the lenders will also get comfortable. There will be some impact on the margins and profitability in case one is not able to infuse the lending rates and protect their margins,” he said.

RBI GUIDELINES FOR NBFCs

• RBI mandates non-deposit taking NBFCs with an asset size of Rs 10,000 crore and all deposit taking NBFCs to maintain LCR from Dec 1, 2020

• Initially,NBFCs had to maintain a minimum of 50% of high quality liquid assets as part of the LCR, which will touch 100% by Dec 2024

• For non-deposit taking NBFCs with an asset size of over Rs 5,000 crore and less than Rs 10,000 crore, a minimum of 30% will be of liquid assets with LCR mandate from Dec 2020. This will eventually reach 100 per cent by 2024

• Core investment companies, smaller NBFCs, non-operating financial holding firms and standalone primary dealers have been exempted from LCR requirements