RBI proposes norms to help large NBFCs beat cash crunch

The RBI's draft circular on the 'Liquidity Risk Management Framework for NBFCs and Core Investment Companies (CICs)' was released on Friday. 

RBI proposes norms to help large NBFCs beat cash crunch
The RBI reiterated that it remains committed to promote a robust, vibrant and well functioning NBFC sector. Image source: Reuters
By ZeeBiz WebTeam
Updated: Sat, May 25, 2019
01:27 pm
New Delhi, ZeeBiz WebDesk
RELATED NEWS
RBI Monetary Policy: Shaktikanta Das says closely monitoring NBFCs, HFCs - Here's how they reacted RBI Monetary Policy: Shaktikanta Das says closely monitoring NBFCs, HFCs - Here's how they reacted
Cyclone Fani impact on NBFCs, MFCs in Odisha: This is what ICICI Securities has to say Cyclone Fani impact on NBFCs, MFCs in Odisha: This is what ICICI Securities has to say
Budget in India is becoming irrelevant as new initiatives are announced throughout the year: Sanjiv Bajaj, Bajaj Finserv Budget in India is becoming irrelevant as new initiatives are announced throughout the year: Sanjiv Bajaj, Bajaj Finserv
Stocks in Focus on January 17: NIIT Tech, Hexaware to HUL; here are 5 newsmakers of the day Stocks in Focus on January 17: NIIT Tech, Hexaware to HUL; here are 5 newsmakers of the day
'50% rise in shadow-banking loans in Oct unlikely to sustain' '50% rise in shadow-banking loans in Oct unlikely to sustain'

The Reserve Bank of India has proposed a set of guidelines for large NBFCs to help them deal with severe liquidity problems. According to 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's draft circular on the 'Liquidity Risk Management Framework for NBFCs and Core Investment Companies (CICs)' was released on Friday. 

RBI circular said, "The Non-Banking Financial Companies (NBFCs) play an important role in the financial system of the country, particularly in delivering credit to the last mile, including the retail as well as MSME sectors. NBFCs’ ability to perform their role effectively and efficiently requires them to be financially resilient, well-regulated and properly governed so that they retain the confidence of all their stakeholders including their lenders and borrowers."

RBI has placed on its website, a draft circular on the “Liquidity Risk Management Framework for Non-Banking Financial Companies (NBFCs) and Core Investment Companies (CICs)” to be adopted by all deposit-taking NBFCs; non-deposit taking NBFCs with an asset size of Rs 100 crore and above; and all CICs registered with the Reserve Bank.

Among others, "the draft guidelines cover application of generic ALM principles, granular maturity buckets in the liquidity statements and tolerance limits, liquidity risk monitoring tool and adoption of the “stock” approach to liquidity."

Further, it stated that "the draft proposes to introduce Liquidity Coverage Ratio (LCR) for all deposit-taking NBFCs; and non-deposit taking NBFCs with an asset size of Rs 5000 crore and above. 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 reiterated that it remains committed to promote a robust, vibrant and well functioning NBFC sector.

Meanwhile, in another notification, RBI proposes to inject durable liquidity through OMO purchase auction in June 2019. The apex bank statement said, "Based on a review of the evolving liquidity conditions and assessment of the durable liquidity needs going forward, RBI has decided to conduct purchase of Government securities under Open Market Operation (OMO) for ₹ 150 billion on June 13, 2019. The Government securities to be purchased in the auction would be communicated in due course."

RBI bid is to ease liquidity concerns. Notably, the sale or buying of g-secs infuses or reduces liquidity. OMOs like repo rate, cash reserve ratio and statutory liquidity ratio are monetary policy tools to balance inflation.

The apex bank's steps are said to be taken in the wake financial sector facing liquidity crunch ever since the Infrastructure Leasing and Financial Services Ltd (IL&FS) defaulted in its payment obligations, causing reluctance among lenders to lend to the NBFC sector.