MUMBAI : Liquidity coverage ratio (LCR) norms for non-banking financial companies (NBFCs) will take effect on 1 December 2020, the Reserve Bank of India (RBI) said on Monday, extending its previous date of 1 April.

According to the central bank’s final guidelines on liquidity risk management framework for NBFCs and core investment companies, LCR, which refers to the share of high quality liquid assets to be set aside to meet short-term obligations, will be introduced in stages.

In its final guidelines, RBI said NBFCs with assets of 10,000 crore and above will have to maintain a minimum of 50% of LCR as high quality liquid assets (HQLA), while those with assets of 5000-10,000 crore will have to maintain 30% LCR.

In both cases, LCR will be progressively increased to 100% by December 2024. The draft guidelines had earlier proposed that all non-banks will have to initially maintain60% LCR from April 2020.

The changes are in line with the suggestions made by the NBFC sector, which had sought relaxations in LCR norms.

These guidelines come on the back of rating downgrades and debt defaults by several NBFCs and the need for a stronger asset liability management (ALM) framework. Many NBFCs have run up serious mismatches in their books by taking short-term loans and giving out long-term loans.

“The liquidity risk management framework for NBFCs finalized by RBI is largely in line with the draft framework proposed earlier this year. The RBI has, however, ensured a smoother glide path for implementation of the framework by extending the start date for implementation and by phasing out the implementation schedule into two categories of NBFCs. This will ensure that NBFCs get adequate time to adjust to the new regime, especially keeping in mind the current market conditions," said Nachiket Naik, head, corporate lending, Arka Fincap.

The regulator has also proposed to revise the ALM of NBFCs to ensure that the difference between inflows and outflows during the first seven days of the month is not more than 10% of total outflows.

Similarly, over the next 8-14 days and 15-30 days, the cash flow mismatch should be only 10-20% of cumulative outflows.

This is to ensure that NBFCs’ reliance on external debt to repay maturing debt is reduced, given the current market conditions where funding from banks and mutual funds has become scarce.

The RBI also asked NBFCs to adopt liquidity risk monitoring tools to capture any possible liquidity stress. This will include concentration of funding by counterparty/ instrument/ currency, availability of unencumbered assets that can be used as collateral for raising funds, certain early warning market-based indicators, such as price-to-book ratio, coupon on debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements, RBI said.

The guidelines also proposed to introduce a stock approach to liquidity—as opposed to a cash flow approach—to ensure asset adequacy to repay debt.

For instance, the liquidity ratios being proposed are short-term liability to total assets; short-term liability to long-term assets; commercial papers to total assets; non-convertible debentures (with original maturity less than one year) to total assets; short-term liabilities to total liabilities; and long-term assets to total assets among others.


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