RBI Revises Liquidity Risk Management Guidelines for NBFCs

Mumbai, November 5: In an effort to tighten the Asset Liability Management framework and strengthen non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) recently decided to revise and extant risk management guidelines on liquidity for the same.  According to the final guidelines, all non-deposit taking NBFCs with asset size of Rs. 100 Crore and above are expected to monitor their cumulative mismatches across all time buckets (1-7 days, 8-14 days, and 15-30 days) upto one year with the board’s approval. The apex bank also wants NBFCs to undertake a liquidity risk monitoring metrics, which would aid in capturing any strains in liquidity position, if any. Such tools should cover funding details by counter party. Further, RBI has also emphasised the need for certain early waning market-based indicators including, book-to-equity ratio, coupon on debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements.

 “In order to ensure a sound and robust liquidity risk management system, the Board of the NBFC shall frame a liquidity risk management framework, which ensures that it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources,” noted the circular.

For the same, a necessary internal monitoring mechanism in this regard would be put in place by the Board. In addition to the above measures, NBFCs are required to adopt “stock” approach to liquidity, based on the predefined internal limits as decided by the Board for various critical ratios pertaining to liquidity risk.  

Also, the RBI, introduced liquidity coverage ratio (LCR), to promote resilience of NBFCs towards potential liquidity disruptions by way of maintaining a liquidity buffer, and ensuring to follow sufficient High-Quality Liquid Asset (HQLA) to survive any acute liquidity stress scenario lasting 30 days.  “The stock of HQLA to be maintained by NBFCs shall be minimum of 100 per cent of total net cash outflows over the next 30 calendar days. The LCR requirement shall be binding on NBFCs from December 1, 2020 with the minimum HQLAs to be held being 50 per cent of the LCR, progressively reaching up to the required level of 100 per cent by December 1, 2024,” said RBI in a circular.