The Reserve Bank of India (RBI) on Monday introduced its liquidity management framework for cash-strapped non-banking financial companies (NBFCs).
The apex bank has said that NBFCs have to now maintain a liquidity buffer of high quality liquid assets to meet short-term obligations so that they can survive any acute liquidity crisis.
The RBI has 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 liquidity coverage ratio (LCR) from December 1, 2020. LCR is the proportion of high liquid assets set aside to meet short-term obligations.
“The stock of high quality liquid assets to be maintained by the NBFCs shall be a minimum of 100 per cent of total net cash outflows over the next 30 calendar days,” the RBI said.
Initially, NBFCs have to maintain a minimum of 50 per cent of high quality liquid assets as a part of the LCR which will then 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.
In order to strengthen the asset liability mismatch (ALM) positon of NBFCs, the RBI has further segregated the 1-30 day time bucket in the statement of structural liquidity into granular buckets of 1-7 days, 8-14 days, and 15-30 days. It limited the extent of mismatch permitted during these periods.
The RBI has said that the negative mismatches in the ALM position of NBFCs in the 1-7 day bucket cannot exceed 10 per cent. The same holds true in the 8-14 day bucket while in the 15-30 day bucket, NBFCs can maintain a maximum of 20 per cent negative mismatch in their ALM position.
“NBFCs, however, are expected to monitor their cumulative mismatches across all other time buckets upto 1 year by establishing internal prudential limits with the approval of the board,” the RBI said.
Following the failure of Infrastructure Leasing and Financial Services (IL&FS), the problem of ALM mismatch of NBFCs came to the fore wherein these companies were borrowing in the short term to lend for the long term.
Under the new guidelines, the RBI has asked NBFCs to adopt a “stock” approach to liquidity risk measurement. The liquidity ratios proposed by the regulator include short-term liability to total assets; short-term liability to long-term assets; commercial papers to total assets; non-convertible debentures (NCDs) (original maturity less than one year) to total assets; short-term liabilities to total liabilities; long-term assets to total assets.
The RBI has also asked the NBFCs to adopt liquidity risk monitoring tools to capture strains in the liquidity position. The various metrics that the regulator has asked the NBFCs to adopt include “concentration of funding”, which will help in identifying those significant sources of funding, the withdrawal of which could trigger liquidity problems.
Other tools include “available unencumbered assets” which have the potential to be used as collateral to raise additional secured funding in secondary markets.
Lastly, the RBI has asked the NBFCs to adopt “market-related monitoring tools” as part of the risk monitoring tools that will include high frequency market data. “This can serve as early warning indicators in monitoring potential liquidity difficulties at the NBFCs,” the RBI said.
According to the guidelines, the board or committee set up for the purpose will monitor on a monthly basis, the movements in their book-to-equity ratio for listed NBFCs and the coupon at which long-term and short-term debts are raised by them.
Furthermore, the RBI said aspects like off-balance sheet and contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position management and contingency funding plan have to also be monitored so as to manage liquidity.
The RBI has also asked the NBFCs to disclose funding concentration based on significant counterparties as well as based on significant instruments.
Moreover, it has asked NBFCs to disclose top 10 large borrowers and 20 large depositors as well as their exposure to commercial papers, non-convertible debentures and other short term liabilities.
The RBI had put out the draft guidelines for liquidity risk management framework in May this year and asked for feedback from various stakeholders.