RBI Issues Guidelines For NBFCs To Follow Liquidity Capital Ratio Rules

In a notification issued by the Reserve Bank of India (RBI) on Tuesday, the central bank informed of its decision to revise the extant guidelines on liquidity risk management for NBFCs (Non-Banking Finance Companies).

"In order to strengthen and raise the standard of the Asset Liability Management (ALM) framework applicable to NBFCs, it has been decided to revise the extant guidelines on liquidity risk management for NBFCs. All non-deposit taking NBFCs with asset size of Rs 100 crore and above, systemically important Core Investment Companies and all deposit taking NBFCs irrespective of their asset size, shall adhere to the set of liquidity risk management guidelines," it said.

As per RBI's guidelines, "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 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."

The stock of HQLA to be maintained by the NBFCs shall be minimum of 100 percent of total net cash outflows over the next 30 calendar days.

The LCR requirement on NBFCs becomes effective from 1 December 2020 with the minimum HQLAs to be held being 50 percent of the LCR. The central bank has set a timeline for the HQLAs to reach the required level of 100 percent progressively by 1 December 2024.

Non-deposit taking NBFCs with asset size of Rs 5,000 crore and above but less than Rs 10,000 crore, are required to start with the minimum requirement for HQLAs to be held being 30 percent of the LCR by 1 December 2020. A timeline has also been set for them to progressively comply with 100 percent requirement by December 2024.

The changes are in line with suggestions previously made by NBFCs seeking relaxation on LCR norms in consideration with current market conditions. The guidelines were issued by RBI on the back of recent rating downgrades and debt defaults by several NBFCs. It is hoped to assure asset adequacy in case of debt defaults.