Liquidity Risk Management Framework for Non-Banking Financial companies and Core Investment Companies – Draft Guidelines for public comments
In order to strengthen and raise the standard of 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 1 billion 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 given below. It will be the responsibility of the Board of each NBFC to ensure that the guidelines are adhered to.
While some of the current regulatory prescriptions applicable to NBFCs on ALM framework have been recast below, a few additional features including disclosure standards have also been introduced.The important changes are as under:
i) Granular Maturity Buckets and Tolerance Limits
The 1-30 day time bucket in the Statement of Structural Liquidity is bifurcated into granular buckets of 1-7 days, 8-14 days, and 15-30 days. The net cumulative negative mismatches in the maturity buckets of 1-7 days, 8-14 days, and 15-30 days should not exceed 10%, 10% and 20% of the cumulative cash outflows in the respective time buckets. NBFCs, however, are expected to monitor their cumulative mismatches (running total) across all other time buckets upto 1 year by establishing internal prudential limits with the approval of the Board. The above granularity in the time buckets would also be applicable to the interest rate sensitivity statement required to be submitted by NBFCs.
ii) Liquidity risk monitoring tools
NBFCs shall adopt liquidity risk monitoring tools/metrics in order to capture strains in liquidity position, if any. Such monitoring tools should cover a) concentration of funding by counterparty/ instrument/ currency, b) availability of unencumbered assets that can be used as collateral for raising funds; and, c) certain early warning market-based indicators, such as, price-to-book ratio, coupon on debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements. The Board of NBFCs should put in place necessary internal monitoring mechanism in this regard.
iii) Adoption of “stock” approach to liquidity
In addition to the measurement of structural and dynamic liquidity, NBFCs are also mandated to monitor liquidity risk based on a “stock” approach to liquidity. The monitoring shall be by way of predefined internal limits as decided by the Board for various critical ratios pertaining to liquidity risk. Indicative liquidity ratios areshort-term liability to total assets; short-term liability to long-term assets; commercial papers to total assets; non-convertible debentures(NCDs)(original maturity less than one year)to total assets; short-term liabilities to total liabilities; long-term assets to total assets; etc.
iv) Extension of liquidity risk management principles
In addition to the liquidity risk management principles underlining extant prescriptions on key elements of ALM framework, it has been decided to extend relevant principles covering other aspects of monitoring and measurement of liquidity risk, viz., off-balance sheet and contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position management, and contingency funding plan.
Introduction of Liquidity Coverage Ratio
All non-deposit taking NBFCs with asset size of ₹ 50 billion and above, and all deposit taking NBFCs irrespective of their asset size, shall maintain a liquidity buffer in terms of a Liquidity Coverage Ratio (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% of total net cash outflows over the next 30 calendar days. The LCR requirement shall be binding on NBFCs from April 01, 2020 with the minimum HQLAs to be held being 60% of the LCR, progressively increasing in equal steps reaching up to the required level of 100% by April 01, 2024, as per the time-line given below:
| From | April 1, 2020 | April 1, 2021 | April 1, 2022 | April 1, 2023 | April 1, 2024 |
| Minimum LCR | 60% | 70% | 80% | 90% | 100% |
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