The Reserve Bank of India has issued draft circular on “Liquidity Risk Management Framework for Non-Banking Financial Companies (NBFCs) and Core Investment Companies (CICs)” on May 24, 2019, for public comments. The Framework will be adopted by:
- all deposit taking NBFCs
- non-deposit taking NBFCs with an asset size of ₹ 100 crore and above
- all CICs registered with the Reserve Bank.
The draft Framework contains regulatory prescriptions applicable to NBFCs & CICs on Asset Liability Management (ALM) framework along with new features. Important new features are as follows:
i) Granular Maturity Buckets and Tolerance Limits
While submitting the Statement of Structural Liquidity and interest rate sensitivity statement, now the NBFCs/ CICs have to make the disclosure bifurcated into granular buckets of 1-7 days, 8-14 days, and 15-30 days, along with net cumulative negative mismatches which should not exceed 10%, 10% and 20% of the cumulative cash outflows in the respective time buckets.
ii) Liquidity risk monitoring tools
NBFCs shall adopt liquidity risk monitoring tools/metrics in order to capture strains in liquidity position. Such monitoring tools should cover a) concentration of funding availed by counterparty/ instrument/ currency, b) availability of unencumbered assets that can be used as collateral for raising funds; and, c) certain early warning market-based indicators, such as, price-to-book ratio, coupon on debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements. The Board of NBFCs should put in place necessary internal monitoring mechanism in this regard.
iii) Adoption of “stock” approach to liquidity
In addition to the measurement of structural and dynamic liquidity, NBFCs are also mandated to monitor liquidity risk based on a “stock” approach to liquidity. The monitoring shall be by way of predefined internal limits as decided by the Board for various critical ratios pertaining to liquidity risk. Indicative liquidity ratios areshort-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; etc.
iv) Extension of liquidity risk management principles
Liquidity risk management principles to now also apply to off-balance sheet and contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position management, and contingency funding plan.
v) Introduction of Liquidity Coverage Ratio (LCR):
The draft requires all non-deposit taking NBFCs with asset size of Rs 5,000 crore and above, and all deposit taking NBFCs irrespective of their asset size, to maintain a liquidity buffer in terms of a liquidity coverage ratio (LCR). This Framework is proposed to be implemented in a period of 4 years (April 2020 to April 2024) to ensure a smooth transition to the LCR regime.
Click here to see press release.
Click here to see draft Framework.
