The Reserve Bank of India Friday proposed a set of guidelines for large NBFCs to help them deal with severe liquidity problems and prevent re-occurrence of IL&FS type of debt crisis.
As per the proposal, a Liquidity Coverage Ratio (LCR) regime would be introduced in all deposit-taking Non-Banking Financial Companies (NBFCs) and non-deposit taking shadow banks with an asset size of Rs 5,000 crore and above in a phased manner.
The RBI has released a draft circular on the 'Liquidity Risk Management Framework for NBFCs and Core Investment Companies (CICs).
With a view to ensuring 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 April 2020 and up to April 2024.
"An NBFC shall maintain an adequate level of unencumbered HQLA (High Quality Liquid Assets) that can be converted into cash to meet its liquidity needs for a 30 calendar-day time horizon under a significantly severe liquidity stress scenario...," the draft said.
HQLA means liquid assets that can be readily sold or immediately converted into cash at little or no loss of value or used as collateral to obtain funds in a range of stress scenarios.
The draft said the LCR requirement would be binding on NBFCs from April 01, 2020, with the minimum LCR to be 60 per cent, progressively increasing in equal steps till it reaches the required level of 100 per cent, by April 1, 2024.
The proposed guidelines have been issued after "an analysis of the recent developments in the NBFC sector", said the RBI without naming any particular NBFC.
Among others, the draft guidelines also cover the 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 RBI further proposed that Asset-Liability Management Committee (ALCO) consisting of the NBFC's top management should be responsible for ensuring adherence to the risk tolerance/limits set by the Board as well as implementing the liquidity risk management strategy of the NBFC.
An NBFC should formulate a contingency funding plan (CFP) for responding to severe disruptions which might affect the NBFC's ability to fund some or all of its activities in a timely manner and at a reasonable cost, the draft said, on which the RBI has invited stakeholder comments by June 14.
Many NBFCs, including DHFL and Indiabulls Finance, came under severe liquidity pressure compelling them to bring down their reliance on commercial papers.
Ever since the IL&FS crisis erupted, banks have been averse to lending to the sector, which has put them in a tight spot. There are concerns that NBFCs may run out of money, which will lead to defaults.
According to estimates, about Rs 1 lakh crore of commercial papers (CPs) raised by NBFCs from investors will come up for redemption in the next three months.
CPs are debt instruments issued by companies to raise funds for a time period of up to one year.
As the NBFCs are cash-strapped, there is a looming fear that they will default on the CPs.
Earlier this month, the RBI had announced that it would create a special cadre to supervise and regulate financial institutions, including banks and NBFCs.
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