Tighter Liquidity Norms For Nbfcs

In a major tightening of norms, the Reserve Bank of India (RBI) yesterday hiked the percentage of liquid assets to be maintained by non-banking finance companies (NBFCs). NBFCs which are presently required to maintain 10 per cent of their deposits in liquid assets will now have to maintain 12.5 per cent and 15 per cent of deposits in government securities or guaranteed bonds, with effect from January 1, 1998, and April 1, 1998, respectively.

There will, however, be no change in the liquid asset requirements (10 per cent) for residuary non-banking companies.

The move comes in the wake of the CRB Capital Markets scam, which led to a loss of Rs 1,200 crore to depositors and the financial system.

 

A press note issued by the RBI yesterday stated that the increase in liquid assets will strengthen the protection available to the depositors and ensure healthy functioning of the non-banking finance companies

In a bid to keep these liquid assets unencumbered and free to be sold in case there is a run on the NBFC, the RBI has ordered that they be kept in the custody of a scheduled commercial bank.

These securities can be withdrawn only for repayment to the depositor or for substitution with a matching value or if the deposits decrease, the RBI has stipulated.

Accordingly, non-banking finance companies that are unregistered loan and investment companies (which at present maintain 5 per cent of their deposits in government securities and guaranteed bonds) shall maintain 7.5 per cent and 10 per cent of the deposits in these securities effective from January 1, 1998 and April 1, 1998 respectively.

However, housing finance companies need not apply for a certificate of registration from the RBI as provided in Section 45IA of the RBI Act, 1934. These companies will continue to be regulated by the National Housing Bank (NHB),under the provision of the NHB Act, 1987.

The central bank has said that the housing finance companies have been exempted form all provisions of Chapter III B of the RBI Act 1934, as amended by the RBI (Amendment) Act, 1997.

Association of Leasing and Financial Services (ALFS) companies have welcomed the RBIs tightening of liquidity requirements.

According to ALFS executive director Mahesh Thakkar, The regulators have taken a positive step as the move will work towards improving the confidence of the investor in the non-banking finance sector.

By introducing a phased implementation of the tightening of liquidity requirements, the RBI has given sufficient time for the NBFCs to make the necessary adjustments they will have to make in their portfolio.