The requirement of additional liquidity to meet the norms varies across NBFCs, as the companies, especially those with weaker financial profiles, had gradually beefed up their on-balance sheet liquid assets over the past year, the report said
Guidelines issued by the central bank on liquidity risk management would discourage NBFCs to go for short-tenor borrowings, according to a report by India Ratings and Research (Ind-Ra). Some non-banks in recent times came under financial stress due to the mismatch in the asset-liability profiles. In light of this, the recently issued guidelines by the Reserve Bank of India (RBI) would also improve discipline in liquidity maintenance and transparency through better reporting standards.
The new guidelines would discourage NBFCs from borrowing less than a month’s tenure, as they have to maintain adequate liquidity buffers for outflows within a month, the ratings agency said. As per the new guidelines, 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 be subject to a liquidity coverage ratio (LCR) requirement of minimum 50% by December 1, 2020, progressively reaching up to 100% levels by December 2024. Similarly, non-deposit taking NBFCs with asset size between Rs 5,000 crore and Rs 10,000 crore would be required to maintain LCR at minimum 30% by December 1, 2020.
“NBFCs will have to eventually shore up liquidity on a daily basis as against at financial reporting dates. This would increase financial discipline and strengthen the liquidity profiles of NBFCs, making them more resilient during cycles of stress,” the report said.
The requirement of additional liquidity to meet the norms varies across NBFCs, as the companies, especially those with weaker financial profiles, had gradually beefed up their on-balance sheet liquid assets over the past year, the report said. During the rating agency’s assessment of asset liability management of the top 20 NBFCs at FYE19, it found that the shortfall of high quality liquid assets (HQLA) stood at Rs 2400 crore or 1% of total assets for NBFCs, which were unable to meet the 50% LCR requirement.
Meanwhile, the shortfall of HQLA stood at Rs 8,700 crore (2.3% of total assets) for NBFCs falling short of the 100% LCR requirement. In FY18, the corresponding shortfall stood at Rs 4,300 crore(2.44%) and Rs 11,900 crore (5.44%), respectively.
According to the analysis, five NBFCs that did not meet the LCR requirement of 50%, had an average HQLA to total asset ratio of 1.2% as against 2.2% required to meet 50% LCR requirement. However, the study found that there would be negligible impact on return on assets (ROA) due to negative carry from maintaining additional liquidity to meet the 50% LCR requirement.