Liquidity Crunch: RBI seeks to tighten ALM norms for NBFCs

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Published: May 25, 2019 4:05:29 AM

Earlier this month, the central bank directed NBFCs with assets of over Rs 5,000 crore to appoint chief risk officers amid an evolving scenario of severe liquidity stress for non-bank lenders.

The monitoring shall be by way of predefined internal limits as decided by the board for various critical ratios pertaining to liquidity risk.

Amid a persisting liquidity crunch among some non-banking finance companies (NBFCs), the Reserve bank of India (RBI) on Friday put out a draft circular tightening the norms for their asset liability management (ALM). The central bank proposed to introduce liquidity coverage ratio (LCR) for all deposit-taking NBFCs and also non-deposit taking NBFCs with an asset size of `5,000 crore and above.
The LCR will serve as a buffer that will strengthen the resilience of NBFCs to potential liquidity disruptions by ensuring that they have sufficient high-quality liquid assets (HQLA) to survive any acute stress scenario lasting for 30 days.

The HQLA stock shall be a minimum of 100% of total net cash outflows over the next 30 calendar days, the central banks said, adding the LCR requirement will be binding on NBFCs from April 1, 2020. The minimum HQLAs to be held will be 60% of the LCR, which will progressively increase in equal steps reaching up to the required level of 100% by April 1, 2024.

The 1-30 day time bucket in the statement of structural liquidity is bifurcated into granular buckets of 1-7 days, 8-14 days, and 15-30 days. The net cumulative negative mismatches in the maturity buckets of 1-7 days, 8-14 days, and 15-30 days should not exceed 10%, 10% and 20% of the cumulative cash outflows in the respective time buckets, the RBI said.

“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 from April 2020 and going upto April 2024,” the RBI said in a statement.
In a recent interview to FE, chief economic adviser Krishnamurthy Subramanian stressed that liability mismatch of firms in the entire shadow- banking space needed to be “very tightly and carefully monitored” to ensure the crisis doesn’t recur or flare up. “Assets of some NBFCs are long-dated while liabilities short-term. When going gets tough, those NBFCs that are not solvent enough find it difficult to roll over (payment obligation). So what is typically a solvency issue appears to have been a liquidity issue,” Subramanian said.

According to the RBI draft, NBFCs will have to adopt liquidity risk monitoring tools or metrics in order to capture strains in liquidity position. Such monitoring tools should cover concentration of funding by counterparty/ instrument/ currency, availability of unencumbered assets that can be used as collateral for raising funds, and certain early-warning market-based indicators, such as price-to-book ratio, coupon on debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements. The boards of NBFCs should put in place necessary internal monitoring mechanism in this regard, the draft said.

In addition to the measurement of structural and dynamic liquidity, NBFCs will also be mandated to monitor liquidity risk based on a “stock” approach to liquidity. The monitoring shall be by way of predefined internal limits as decided by the board for various critical ratios pertaining to liquidity risk.

In addition to the liquidity risk management principles underlining extant prescriptions on key elements of ALM framework, the RBI has decided to extend relevant principles covering other aspects of monitoring and measurement of liquidity risk, including off-balance sheet and contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position management, and contingency funding plan.

Earlier this month, the central bank directed NBFCs with assets of over Rs 5,000 crore to appoint chief risk officers amid an evolving scenario of severe liquidity stress for non-bank lenders.

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