The non-banking financial companies (NBFCs) have stepped up their purchases of short-term government securities to comply with liquidity coverage norms, which require them to maintain a 100% liquidity coverage ratio (LCR) by the end of December.
Although the share of NBFCs is comparatively lower than that of banks, insurance companies, and pension funds, as the deadline to comply with LCR norms approaches, NBFCs have been accumulating short-term bonds, dealers said
Earlier, the Reserve Bank of India came up with LCR guidelines for all non-deposit-taking NBFCs with asset size of Rs 10,000 crore and above, and all deposit-taking NBFCs irrespective of their asset size shall maintain a liquidity buffer in terms of LCR. The idea was to ensure that they have sufficient high-quality liquid assets (HQLAs) to survive any acute liquidity stress scenario lasting for 30 days. The LCR requirement came into effect in December 2020, with a minimum requirement of HQLAs being 50%. This requirement should progressively reach the required level of 100% by December 1, 2024, as per the RBI norms.
“By the end of December, we need to increase our LCR to 100%, and since these guidelines translate into investing more in high-quality liquid assets, we have been buying short-term government bonds. NBFCs as compared to banks and other segments, have just 4% of g-sec holdings, from this, we have significantly improved. Which is a big thing for us but from a market point of view it may not be that substantial,” said a treasury official at a large NBFC.
Since a significant portion of deposits in deposit-taking NBFCs consists of shorter tenures, they generally prefer to purchase government bonds with maturities of less than 10 years to align their assets and liabilities, dealers noted. Buying longer-tenure bonds incurs a negative carry, as the cost of funding exceeds the returns on government bonds. Moreover, government bonds with maturities between 5 and 7 years typically experience less volatility, making them more attractive for NBFCs.
“Since their maximum liability is in 1-2 years, in order to match this liability they usually go for short-term bonds. But the recent buying is mainly because of LCR norms as they have to increase their LCR by 100% till the end of this year,” a dealer with a private bank said.