RBI releases draft circular on ‘Liquidity Risk Management Framework for NBFCs and CICs’

New Delhi: The Reserve Bank of India (RBI) plans to get large non-banking finance companies (NBFC) to invest in government bonds or deposits so as to ensure that they enough to make repayments for one month in case of funds dry up due to a liquidity crisis.

In an attempt to protect lenders and depositors of non-banking finance companies, RBI has notified a draft liquidity risk management framework for NBFC on Friday, according to a ToI report. This move has come at a time when many large lenders have experienced a cash crunch which made them scramble for funds. It may be noted that the liquidity risk management rules will apply to all financial institutions having an asset size of Rs 100 crore and above.

According to the RBI press release, ” 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.”

“While some of the current regulatory prescriptions applicable to NBFCs on ALM framework have been updated/recast, certain new features have been added. Among others, the draft guidelines cover the 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,” the release added.

The RBI press release also cited, “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 5,000 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 up to April 2024.”