Proposes to strengthen asset-liability management (ALM) framework for NBFCs: RBI Annual Report 2018-19

NBFCs constitute around 12% of the total assets of banking and non-banking space

The Reserve Bank of India (RBI) in its annual report for 2018-19 has stated the Reserve Bank proposes to strengthen the asset-liability management (ALM) framework for NBFCs. The RBI has noted that even though NBFCs constitute around 12% of the total assets of banking and non-banking space, the emergence of stress following isolated but large credit events and a wider perception of liquidity shortages revealed the degree of interconnectedness in the financial system and the systemic ramifications. The ongoing strengthening of the liquidity and regulatory framework for NBFCs will be informed by this experience, especially in efforts to remove regulatory arbitrage.

In pursuance of the announcement made in the Union Budget 2019-20, the Government of India has rolled out a scheme offering to provide a one-time partial credit guarantee for first loss up to 10% to public sector banks (PSBs) for purchase of high rated pooled assets amounting to Rs 1 trillion from financially sound NBFCs/Housing Finance Companies (HFCs). This policy measure will support NBFCs' access to funding from the PSBs. On its part, the Reserve Bank will provide required liquidity backstop to the banks against their excess G-sec holdings.

The Reserve Bank has also front-loaded increase in the facility to avail liquidity for liquidity coverage ratio (FALLCR) of 0.5% each of banks' NDTL scheduled for 1 August and 1 December 2019, respectively, for incremental credit given to NBFCs and HFCs, over and above credit outstanding to NBFCs and HFCs as on 5 July 2019.

Dispensing with the Debenture Redemption Reserve (DRR) will also facilitate the issuance of bonds by NBFCs.

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