NBFC Liquidity Framework

Syllabus subtopic: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

News:

• The Reserve Bank of India (RBI) has introduced a ‘liquidity management framework’ for Non-Banking Financial Companies (NBFCs).
• The new guidelines are applicable to all non-deposit-taking NBFCs with an asset size of 100 crore and above, systemically important Core Investment Companies and all deposit-taking NBFCs irrespective of their asset size.

Prelims focus: on the new liquidity norms.

Mains focus: requirement and significance of these norms.

Why this was necessary?

This has come following a liquidity crunch among some NBFCs in meeting their recent repayment obligations after the collapse of the Infrastructure Leasing and Financial Services (IL&FS) group.

This was necessary to strengthen their asset-liability management following the liquidity crisis faced by these firms in the past year.

What’s changed?

• Specific cap on negative asset liability mismatches for particular liquidity buckets.
• NBFCs are mandated to maintain liquidity coverage ratios (LCR). LCR will promote the resilience of NBFCs to potential liquidity disruptions by ensuring that they have sufficient High-Quality Liquid Assets (HQLA) to survive any acute liquidity stress scenario lasting for 30 days.
• Net cumulative mismatches for 1-7 days, 8-14 days, and 15-30 days shall not exceed 10%, 10% and 20% of the cumulative cash outflows in the respective time buckets.
• NBFCs should monitor their cumulative mismatches [running total] across all other time buckets up to one year by establishing internal prudential limits with the approval of the board.
• The LCR requirement will be binding on NBFCs from December 1, 2020, with the minimum HQLAs to be held being 50% of the LCR, progressively reaching up to the required level of 100% by December 1, 2024.

Exemption from LCR norms: Core Investment Companies, Type 1 NBFC-NDs, Non-Operating Financial Holding Companies and Standalone Primary Dealers.

What caused the non-bank lending sector crisis?

• The NBFC crisis is being held up as one of the culprits of the current slowdown.
• There is a near consensus that this crisis was triggered by the collapse of Infrastructure Leasing and Financial Services Ltd (IL&FS) and the unfolding of the problems of Dewan Housing Finance Corporation Ltd (DHFL).
• Besides, Raising capital adequacy limits and liquidity margins for NBFCs might have tempered their profitability and hurt their valuations.

Syllabus subtopic: Conservation, Environmental Pollution & Degradation, Environment impact assessment

News: The odd-even scheme for automobiles plying in Delhi has begun. Due to a steep deterioration in the air quality index or AQI in the city, the Environmental Pollution (Prevention and Control) Authority (EPCA) had to declare a public health emergency as a desperate measure to contain the silent killer.

Mains Focus: Odd-Even scheme; Delhi’s air pollution - reasons

About Odd-Even scheme

• Innovative idea – The odd-even scheme was first introduced three years ago. It is an out-of-the-box idea with unproven claims on containing AQI levels.
• Limited to 4 wheelers – It is terrific to focus attention on air pollution caused by automobiles. It exempts two-wheelers and does not allow privately-owned hybrids and CNG vehicles.
• Need for rains – Unless the rains turn up, and the cross winds regain momentum, Odd-Even is unlikely to bring down AQI below the prevailing hazardous levels.

Crisis

• Annual event – For three years now, NCR has seen the pollution saga every winter.
• Beyond one cause – There is a need to take the debate beyond the single causes like stubble burning.

Understanding the problem

Topography – NCR pollution problem is partly because of the nature of its topography.

• It is shaped like a saucer and hence is hugely dependent on a cross breeze.
• This breeze serves it for most of the year, except in winter—to keep its AQI under control.
• This is the reason why the stubble burning that happens in the early part of the year does not harm Delhi as much.

Growing vehicles

• Vehicular pollution has been growing very sharply.
• The emissions of PM by automobiles have surged by 40% in the eight years that ended 2018.
• According to the Economic Survey put out by the Delhi government, there were 10.9 million vehicles in NCR at the end of 2018.
• In the absence of winds, stubble burning and bursting of crackers send the pollution problem over the tipping point.

Need for a comprehensive solution

• Public transport – Metro Rail has been critical in addressing transport woes of NCR’s working population. This has to be dovetailed with a robust public bus network.
• Road design – government should focus on building and maintaining good roads and implementing laws to ensure only road-worthy vehicles ply.
• Need for a public movement – the residents of Delhi have to force a public debate.