RBI Releases Draft Circular On Liquidity Risk Management Framework for Non-Banking Financial Companies And Core Investment Companies
Concerned over stress in the NBFC sector, RBI Governor Shaktikanta Das Saturday said there is a need to have a fresh look at the regulation as well as supervision, and the central bank will come out with guidelines on liquidity risk management framework shortly.
Addressing 15th Annual Convocation of Post Graduate Diploma in Management at National Institute of Bank Management (NIBM) here, he said, fine tuning and improving supervision and regulation are continuous exercise.
In this direction, he said, the RBI has reduced the period of the NBFC supervision to 12 months from 18 months earlier.
He also expressed hope that the Board of Directors of non-banking financial companies (NBFCs) to act diligently and take necessary action based on Reserve Bank's supervision reports.
Further, Das said, "Our objective is to harmonise the liquidity norms between banks and NBFCs, taking into account the unique business model of the NBFCs vis-a-vis banks. In this context, the final guidelines on the liquidity risk management framework, which we have proposed recently, will be issued shortly".
The debt default by a large NBFC in mid-2018 highlighted the vulnerability and need for strengthening regulatory vigil on the sector in general and on the asset liability management (ALM) framework in particular, he noted.
In this context, the Reserve Bank of India (RBI) last month issued a draft circular on liquidity risk management framework for non-banking financial companies and core investment companies.
Observing that the conventional approach to regulation and supervision of NBFCs has been light-touch, Das said, "We will not hesitate to take any required steps to maintain financial stability in the short, medium and long-term".
With a view to strengthen the sector, maintain stability and avoid regulatory arbitrage, he said, the RBI has been proactively taking necessary regulatory and supervisory steps, keeping in mind the requirements of the time.
"In the light of recent developments, there is a case for having a fresh look at their regulation and supervision. It is our endeavour to have an optimal level of regulation and supervision so that the NBFC sector is financially resilient and robust.
"At the same time, NBFCs should be enabled to operate as well-functioning entities with necessary capacity to reach wider sections of population. The Reserve Bank will continue to monitor the activity and performance of this sector with a focus on major entities and their inter-linkages with other sectors," the governor said.
It is to be noted that many large NBFCs came under severe liquidity pressure, compelling them to bring down their reliance on commercial papers following series of default by group companies of IL&FS beginning September last year.
Ever since the IL&FS crisis erupted, banks have been averse to lending to the sector, which has put them in a tight spot. There are concerns that NBFCs may run out of money, which will lead to defaults.
According to estimates, about Rs 1 lakh crore of commercial papers (CPs) raised by NBFCs from investors will come up for redemption in the next three months.
CPs are debt instruments issued by companies to raise funds for a time period of up to one year.
Recently, DHFL was downgraded on concern of default in payment obligation towards CPs.
Highlighting some important measures taken by the RBI for NBFC sector, the governor said, it has relaxed the norms for NBFCs to securitise their loan books in order to improve liquidity in the cash starved business.
In addition, banks have been allowed to provide partial credit enhancement (PCE) to bonds issued by the systemically important non-deposit taking NBFCs and housing finance companies, he said.
With a view to eschewing the regulatory arbitrage between banks and non-banks, he said, the RBI has been aligning the regulatory and supervisory frameworks for NBFCs with that of banks and a comprehensive Information Technology (IT) framework for strengthening off-site surveillance of NBFCs is being put in place.
Further, multiple categories of NBFCs are being rationalised into fewer categories in order to provide them greater operational flexibility, he added.