RBI proposes to revise norms on asset liability management, disclosure by NBFC

To address the liquidity problems in the NBFC sector, the Reserve Bank of India (RBI) has come out with draft guidelines for non-banking financial companies (NBFCs) and core investment companies (CICs).

In the draft circular, RBI, among several other guidelines, has suggested introduction of a Liquidity Coverage Ratio (LCR), which is the proportion of highly liquid assets set aside to meet short term obligations for all NBFCs with an asset size of more than Rs 5,000 crore.

The central bank proposal is to implement it in a calibrated manner through a glide path over a period of four years commencing from April 2020 and going up to April 2024, said RBI in a release.

All deposit-taking NBFCs irrespective of their asset size, shall maintain a liquidity buffer in terms of a Liquidity Coverage Ratio (LCR) which will promote resilience of NBFCs to potential liquidity disruptions by ensuring that they have sufficient High-Quality Liquid Asset (HQLA) to survive any acute liquidity stress scenario lasting for 30 days, it added.

The move has come after the mismatch NBFC faced especially in the Infrastructure Leasing and Financial Services (IL&FS) case last year, which led to a series defaults across the shadow banking sector. This also resulted in a series of rating downgrades, which had led to a liquidity crisis.

RBI had also expressed concerned about liquidity issues faced by NBFCs.

Experts observing the sector said that the RBI proposal is a practical move and it should further stabilise the NBFC sector.

Among several other proposals, the RBI has also asked NBFCs to adopt liquidity risk monitoring tools to capture any possible liquidity stress and to introduce a stock approach to liquidity—as opposed to a cash flow approach—to ensure asset adequacy to repay debt.

The RBI has sought comments from NBFCs, market participants and other stakeholders on the draft framework by June 14, 2019.