MUMBAI: Reserve Bank of India has asked all non-banking finance companies (NBFC) with asset size of Rs 5,000 crore and above, and all deposit-taking NBFCs irrespective of their asset size, to maintain liquidity buffer in terms of Liquidity Coverage Ratio (LCR) akin to banks, to strengthen the sector.
In a draft circular issued on Friday, the RBI said that “LCR, which will promote resilience of NBFCs to potential liquidity disruptions by ensuring that they have sufficient High-Quality Liquid Asset to survive any acute liquidity stress scenario lasting for 30 days”, should be maintained starting April 1, 2020. It has given a timeline starting April 2020, when the requirement shall be a minimum of 60 per cent of the LCR, going up to 100 per cent by April 2024.
RBI has put up the draft circular, Liquidity Risk Management Framework for Non-Banking Financial Companies and Core Investment Companies, in public domain for comments until June 14, 2019, after which it plans to issue a final circular. “NBFCs’ ability to perform their role effectively and efficiently requires them to be financially resilient, well-regulated and properly governed, so that they retain the confidence of all their stakeholders including their lenders and borrowers,” RBI said. Tightening of liquidity requirements and risk management comes following concerns raised over the sector’s resilience in the wake of the recent crisis.
RBI has proposed to tighten regulations to guard against asset liability mismatches by bifurcating the 1-30 liquidity bucket vis-a-vis the cumulative cash outflows into 1-7 days, 8-14 days and 15-30 days. It has asked for internal monitoring of the prudential limits and adoption of voluntary risk management guidelines.