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DAILY NEWS ANALYSIS

  • 05 November, 2019

  • 4 Min Read

NBFC Liquidity Framework

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.

Source: The Hindu


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