RBI guidelines to NBFCs for Managing Liquidity Risk

BE/RBINOTE/28/2019

NBFCs are facing liquidity issues. In order to resolve this, RBI has issued draft circular on LIQUIDITY RISK MANAGEMENT FRAMEWORK.

1. In line with the guidelines NBFCs are required to maintain sufficient liquidity, which includes a padding of unencumbered, high quality liquid assets in order to withstand a range of stress events, establish diversified funding strategies and also monitor the risk of intra-group transfers.
2. These guidelies should be followed by all NBFCs with an asst size of Rs. 100 crore and above, and also all CICs among others, Cover application of generic ALM (Asset Liability Management) principles.
3. Here, they are required to segregate 1-30 day time bucket in the statement of structural liquidity into granular maturity buckets and tolerance limits, liquidity risk monitoring tool and adoption of stock approach to the liquidity issue.
4. Further the draft also plans to bring in Liquidity Coverage Ratio (LCR) for all deposit taking NBFCs and non-deposit taking NBFCs who hold an asset size of Rs. 5000 crore and above.
5. In order to bring in a smooth transition to the LCR arena, the process introduces implementing the proposal in a regulated way over a period of four years which commences from April 2020 and goes up to April 2024.
6. Experts are of the opinion that all measures proposed in the draft
7. RBI Proposes to ensure that NBFCs bifurcate their collateral positions into encumbered and unencumbered assets.
8. Also, NBFCs are expected to have enough collateral in order to meet expected and unexpected borrowing needs and possible increase in margin requirements over different time periods.
9. In order to do this, they are required to form a contingency plan for adverse positions that may occur in future.
10. With the board approval NBFCs are expected to manage their mismatches in the liquidity across all other time buckets up to one year, by framing internal prudential guidelines.
11. Also the guideline stresses about importance of maintaining adequate ratios of different nature, in order to face critical situations, which is formulated under Stock Approach.

Note:

• All NBFCs with an asset size of Rs. 5000 and above and all deposit taking NBFCs irrespective of their asset size should maintain a liquidity buffer in terms of Liquidity Coverage Ratio.
• This is expected to improve resilience of NBFCs to the liquidity problems and ensures that they main adequate High Quality Liquid Assets (HQLA) thus enabling them to manage any liquidity stress scenario stretched over a period of 30 days.