Explain in detail the draft rules for NBFCs-Liquidity Risk Management Framework, recently put up by RBI.

January 16, 2022 February 21, 2024

Recently a draft circular was put up by RBI. It included Liquidity Risk Management Framework for Non-Banking Financial Companies and Core Investment Companies.
�New rules for NBFCs:
Liquidity Coverage Ratio:

  • Non-Banking Financial Companies should maintain a liquidity coverage ratio in line with banks
  • The LCR requirement shall be binding on NBFCs from April 01, 2020.The liquidity rules were proposed for all NBFCs
  • For NBFCs with assets above Rs 5,000 crore and deposit-taking NBFCs, the LCR is mandatory

High Quality Liquid Asset:

  • These are cash or government securities that can be quickly sold in the market to raise cash
  • NBFC should have sufficient High Quality Liquid Asset that would keep them liquid for at least 30 days
  • The minimum HQLAs to be held from April 1, 2020 will be 60% of the LCR

Collaterals:

  • An NBFC must actively manage its collateral positions
  • NBFCs should differentiate between encumbered and unencumbered assets
  • NBFCs should monitor such assets so that they can be mobilised in a timely manner
  • All NBFCs must have�contingency funding plansfor responding to severe disruptions

�Liquidity position

  • NBFCs should measure their liquidity in a granular manner
  • Asset-liability mismatches should not exceed 10-20%
  • Liquidity position has to be reported to the RBI
  • Liquidity positions should also be disclosed to the public

With the RBI bringing in the guidelines to manage asset-liability mismatches, lenders will get more confidence. It will ensure that an NBFC has sufficient collateral to meet expected and unexpected borrowing needs.

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