In a Notification dated 4th November, 2019, the Reserve Bank of India (“RBI”) has issued a revised Liquidity Risk Management Framework for Non-Banking Financial Companies (‘NBFC”) and Core Investment Companies.
In order to strengthen and raise the standard of the Asset Liability Management (ALM) framework applicable to NBFCs, the RBI has revised the extant guidelines.
Some key takeaways from the Notification are:
- These guidelines are applicable to the following categories of NBFCs which should strictly adhere to the set of liquidity risk management guidelines:
- All non-deposit taking NBFCs with asset size of ₹ 100 crore and above, systemically important Core Investment Companies; and
- All deposit taking NBFCs irrespective of their asset size.
- These guidelines will not apply to Type 1 NBFC-NDs, Non-Operating Financial Holding Companies and Standalone Primary Dealers.
[Type 1 NBHC-ND (as defined in RBI press release dated June 17, 2016) is the type of NBFC-ND which do not accept public funds, and are not intending to accept public funds in the future and not are having customer interface and are not intending to have customer interface in the future.]
It will be the responsibility of the Board of each NBFC to ensure that the guidelines are adhered to.
- While some of the current regulatory prescriptions applicable to NBFCs on ALM framework have been recast in Annex A of the Notification, a few additional features including disclosure standards have also been introduced.
- The detailed guidelines are given in Annex A and the important changes are as under:
- Granular Maturity Buckets and Tolerance Limits:
ü The 1-30 day time bucket in the Statement of Structural Liquidity is segregated into granular buckets of 1-7 days, 8-14 days, and 15-30 days.
ü The net cumulative negative mismatches in the maturity buckets of 1-7 days, 8-14 days, and 15-30 days should not exceed 10%, 10% and 20% of the cumulative cash outflows in the respective time buckets.
ü NBFCs, however, are expected to monitor their cumulative mismatches (running total) across all other time buckets.
ü The above granularity in the time buckets would also be applicable to the interest rate sensitivity statement required to be submitted by NBFCs.
- Liquidity risk monitoring tools:
ü NBFCs should adopt liquidity risk monitoring tools/metrics in order to capture strains in liquidity position, if any.
ü Such monitoring tools shall cover: a) concentration of funding 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, book-to-equity ratio, coupon on debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements.
ü The Board of NBFCs should put in place necessary internal monitoring mechanism in this regard.
- Adoption of “stock” approach to liquidity:
ü 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.
ü The monitoring shall be by way of predefined internal limits as decided by the Board for various critical ratios pertaining to liquidity risk.
ü Indicative liquidity ratios are short-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.
- Extension of liquidity risk management principles:
ü In addition to the liquidity risk management principles underlining extant prescriptions on key elements of ALM framework, it has been decided to extend relevant principles to cover other aspects of monitoring and measurement of liquidity risk, viz., off-balance sheet and contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position management, and contingency funding plan.
- The Notification further lays down the following types of NBFCs which should adhere to the Introduction of Liquidity Coverage Ratio (LCR) along with the disclosure standards as provided in Annex B of the Notification.
- All non-deposit taking NBFCs with asset size of ₹ 10,000 crore and above, and all deposit taking NBFCs irrespective of their asset size, shall maintain a liquidity buffer in terms of LCR which will promote resilience of NBFCs to potential liquidity disruptions by ensuring that they have sufficient High Quality Liquid Asset (HQLA) to survive any acute liquidity stress scenario lasting for 30 days.
- All non-deposit taking NBFCs with asset size of ₹ 5,000 crore and above but less than ₹ 10,000 crore shall also maintain the required level of LCR starting December 1, 2020.
Further, the timeline for each category of NBFC mentioned above is also given in the Notification.
Please note that the Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company, Deposit taking Company (Reserve Bank) Directions, 2016, Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 and Master Direction – Core Investment Companies (Reserve Bank) Directions, 2016 are being modified accordingly.
Source: Reserve Bank of India
