(Photo: Reuters)
(Photo: Reuters)

New liquidity requirement for non-banks is credit positive, says Moody's

  • According to the report, non-banks are the main originators of ABS transactions in India
  • Starting 1 April 2020, NBFCs must maintain a minimum LCR of 60%

Mumbai: The Reserve Bank of India (RBI) guidelines that said liquidity coverage ratio (LCR) will be applicable to non-banking financial companies (NBFCs) from 1 April, 2020 is credit positive for asset-backed securities (ABS) deals, said a note by Moody's Investors Service on Tuesday.

"The LCR will require NBFCs to increase their stocks of liquid assets and improve liquidity management, which means they will be better equipped to cope with short-term cash outflows. This is credit positive for Indian asset-backed securities (ABS) deals issued by NBFCs because it will reduce the risk that NBFCs would be hit by a liquidity shortfall that would disrupt their ability to collect repayments on loans backing ABS deals," the note said

According to Moody's, non-banks are the main originators of ABS transactions in India. Starting 1 April 2020, NBFCs must maintain a minimum LCR of 60%. The required LCR will then increase in a phased manner to 100% by 1 April 2024.

"The LCR will ensure NBFCs maintain minimum liquidity buffers in the form of high-quality, highly liquid assets such as government bonds to meet short-term outflows, instead of relying on cash inflows to do so as they have done in the past," Moody's said, adding that in India, repayments for loans backing ABS deals are mostly collected or paid in person and in cash, rather than made through electronic payment systems.

Therefore, if NBFCs were hit by a liquidity shortfall, this could disrupt their ability to actively collect loan repayments from borrowers and therefore disrupt the loan amounts flowing through to ABS deals and the new LCR rules will reduce the risk of such a disruption, Moody's added.

"The LCR requirement is the latest in a range of measures introduced to improve funding and liquidity for NBFCs following the September 2018 default of Indian infrastructure financing company IL&FS, which resulted in a credit squeeze on India's short-term capital markets and highlighted structural funding and liquidity weaknesses for NBFCs," the note explained.