Crisis is the mother of prudential norms. The liquidity crisis that non-bank lenders faced in September has given Reserve Bank of India (RBI) reasons enough to propose stricter rules for them. Enter a bunch of liquidity norms that is aimed at fortifying the balance sheets of non-bank lenders. Here are five important implications of the rules:
Making the bad boys be good
To start with, large non-bank lenders already have in place a disciplined liquidity management because they realise its importance. Therefore, the regulator has just made the good habits of strong lenders into industry standard. That way, non-bank lenders that didn’t bother with discipline would have to get their house in order now. It is easy to find these companies because they are mainly the ones that were worst affected by liquidity crunch in September.
But the flip side is that non-bank lenders will see their spreads narrow at least a bit.
No ease of borrowing
The proposed rules that mandate non-bank lenders to keep liquidity coverage ratio would shave off some margin. Since non-banks will have to keep high quality liquidity assets (HQLA) either in cash or government bonds, their interest earnings will reduce to that extent. Lenders with high gap between assets and liabilities would be affected more, according to global brokerage firm Jefferies India Pvt Ltd. But the price of safety is anyway cheaper than that of accidents and non-banks only need to look at the liquidity crisis of September to know.
One more buyer for government bonds
This is perhaps the best outcome of these proposed rules for non-banks. RBI has successfully created another set of captive investors of government bonds. The sovereign bond market needs a larger set of investors to add more depth to it. Non-bank lenders with good balance sheets are the best buyers the government can seek.
More time to get in line
To its credit, the regulator has given enough time to non-bank lenders to maintain liquidity coverage ratio just like it gave banks to do so. Non-bank lenders will have four years starting April 2020 to shore up liquidity coverage ratio to 100% gradually. That said, the impact on earnings cannot be muted.
No place to hide
RBI has asked for more disclosures on liquidity position from non-bank lenders. The regulator has also indicated it would supervise non-banks more closely. This has been the main demand of investors as more information is always helpful in dispelling worries.