Explain in detail the draft rules for NBFCs-Liquidity Risk Management Framework, recently put up by RBI.
Recently a draft circular was put up by RBI. It included Liquidity Risk Management Framework for Non-Banking Financial Companies and Core Investment Companies.
ï¿½New 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
- 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 haveï¿½contingency funding plansfor responding to severe disruptions
- 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.