DRAFT “LIQUIDITY RISK MANAGEMENT FRAMEWORK FOR NBFCs AND CORE INVESTMENT COMPANIES”

Background: 

• The Non-Banking Financial Companies (NBFCs) play an important role in delivering credit to the last mile, including the retail as well as MSME sectors. 
  
  
• However, Many NBFCs have come under severe liquidity pressure ever since the IL&FS crisis erupted, compelling them to stop deposit renewals and resort to high cost borrowings. There are concerns that NBFCs may run out of money, which will lead to defaults. 
  
  
• In the above background, the RBI has released a draft circular on the “Liquidity Risk Management Framework for NBFCs and Core Investment Companies (CICs).” 
  
  

Recent circular: 

• Coverage: This draft, once finalised, needs to be adopted by all deposit taking NBFCs; non-deposit taking NBFCs with an asset size of ₹ 100 crore and above; and all CICs registered with the Reserve Bank. 
  
  
• Features: 
  • The draft guidelines cover application of generic Asset Liability Management (ALM) principles, granular maturity buckets in the liquidity statements and tolerance limits, liquidity risk monitoring tool and adoption of the “stock” approach to liquidity. 
    
    
  • The draft proposes to introduce Liquidity Coverage Ratio (LCR) for all deposit taking NBFCs; and non-deposit taking NBFCs with an asset size of ₹ 5000 crore and above. 
    
    
  
  
  
• Implementation period: To ensure a smooth transition to the LCR regime, the proposal is to implement it in a calibrated manner through a glide path over a period of four years commencing from April 2020 and going upto April 2024.