The Reserve Bank of India (RBI) on Friday released draft circular on “Liquidity Risk Management Framework for Non-Banking Financial Companies and Core Investment Companies” for public comments and has proposed liquidity coverage ratio from April 2020.

The draft framework is applicable to all non-deposit taking non-banking financial companies (NBFCs) with an asset size of over Rs 100 crore and all core investment companies (CICs) registered with RBI.

"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," said RBI in a press release.

"The draft guidelines cover the application of generic Asset Liability Management (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 apex bank said.

According to new RBI guidelines, the board of NBFCs has to frame a liquidity risk management framework which ensures sufficient liquidity is maintained and to have the overall responsibility for the management of liquidity risk.

Further, NBFCs should formulate a contingency funding plan (CFP) for responding to severe disruptions, publicly disclose information on a regular basis that enables market participants to make an informed judgment, make public disclosure on liquidity risk to be made on quarterly basis, disclosure on top 20 large deposits, top 10 borrowings and funding concentration must be regularly disclosed to investors.

The RBI is seeking public comments on the draft framework by June 14, 2019.

Earlier, RBI was concerned about liquidity issues facing some NBFCs such as mortgage or auto lenders and wants to ensure the problems do not become a systemic issue.

The central bank is hoping to use banks to support NBFCs and it will look at options to strengthen risk management systems at these companies, said the sources, who asked not to be named as they are not authorized to discuss the matter with media.

The RBI's board discussed various means to tackle the liquidity problems in the NBFC sector and it has decided to handle it in a "nuanced" manner by improving liquidity and tightening regulatory norms without sending a "panic" signal to the market, said a senior official, directly aware of the discussions.

Among other measures, the RBI in October allowed banks to allocate up to 15 percent of their lending to NBFCs that do not finance infrastructure projects, up from an earlier limit of 10 percent.

The collapse of the Infrastructure Leasing and Financial Services (IL&FS) last year triggered a series defaults across the shadow banking sector, as borrowing costs for the sector surged.

(With inputs from Reuters)

First Published:May 24, 2019 7:19 PM IST