RBI proposes new liquidity norms for NBFCs. How it may impact you

The Reserve Bank of India (RBI) has issued draft guidelines on liquidity management for the non banking finance companies (NBFCS) and proposed a liquidity coverage ratio for large NBFCs covering all deposit-taking NBFCs and non-deposit taking NBFCs with an asset size of ₹5,000 crore and above. Here is a look at what it means and how it will impact you:

THE NEW RULES

The key takeaway from the draft guidelines are that a bank-like liquidity coverage ratio (LCR) for NBFCs to be put in place, granular management of asset liability mismatch and board-led liquidity policies or monitoring. “The guidelines require NBFCs to hold adequate level of high quality liquid assets (to cover the estimated net cash outflows in case of a severe liquidity stress scenario over the next 30 calendar days). This is to ensure NBFCs have enough liquid assets that can be converted to cash to fund the outflows for 30 days in a scenario of acute liquidity stress. With these guidelines, NBFCs will need to stick to ALM and liquidity discipline at all times. More importantly, this will provide comfort to debt market participants that NBFCs will always be prudent on liquidity,” said Kotak in a note.

Analysts note that it will also have an impact on margins. “The need to hold liquid assets will be a drag on margins and may also push some of them to consolidate even more and increase desperation to securitise. Those NBFCs with ALM gaps, lower ratings, and higher funding cost are worse off. NBFCs with better ratings, balanced ALMS, and diversified funding mix are better off,” said CLSA, a capital markets and investment group, in a recent report.

Norms on liquidity management at NBFCs were awaited post the IL&FS incident in September 2018, which exposed the gaps in funding profile at NBFCs. Analysts said the draft rules will improve transparency. “We believe these guidelines are a positive for overall liquidity management of NBFCs, which will make the sector stronger,” said JM Financial in a note.

HOW DOES IT IMPACT YOU?

Company fixed deposits (FDs), unlike bank FDs, don’t come with insurance. Also, it is slightly riskier than bank FDs. Hence, there have been multiple incidents of defaults in company FDs offered by NBFCs. The recent draft guidelines are likely to be beneficial for depositors. “Deposits are one of the important resources for NBFCs to raise money. With focus on LCR and high quality liquid assets, it will benefit all stakeholders including depositors. In the near term, there will be impact on interest margin. However, in the long run it will be good for industry,” said Deo Shankar Tripathi, managing director and chief executive officer of Aadhar Housing Finance Ltd.

The impact of the guidelines if it comes into effect for retail deposits would be higher interest rate and since they have to keep a check on the quality, the defaults are likely to go down. “The company will have to raise more deposits and hence they will have to give higher rates to attract depositors. For depositors, it is a good move. On one hand, they will be offered higher interest rate and on the other hand, the balance sheet of NBFCS will get stronger. The changes of defaults on the depositors’ money will go down,” said Hatim Broachwala, analyst at IDBI Capital Ltd. The RBI is seeking public comments till June 14 on the draft framework for before issuing the final guidelines.