With a view to ensuring a smooth transition to the LCR regime, the proposal is to implement it in a calibrated manner over a period of four years commencing April 2020
THE Reserve Bank of India recently 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 over a period of four years commencing April 2020. “An NBFC shall maintain an adequate level of unencumbered High Quality Liquid Assets (HQLA) 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 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.