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New Guidelines on Liquidity Risk Management framework for NBFCs

Liquidity Risk Management for NBFCs Framework

The Reserve Bank of India (RBI) has revised its guidelines on Liquidity Risk Management framework for NBFCs and Core Investment Companies. This revision took place to strengthen and raise the standard of the Asset Liability Management (ALM) framework applicable to NBFCs. All non-deposit taking NBFCs with asset size of Rs 100 crore and above, Core Investment Companies and all deposit-taking NBFCs irrespective of their asset size shall follow the set of Liquidity Risk Management Guidelines. However, these new guidelines will not apply to Type 1 NBFC –NDs, Non-Operating Financial Holding Companies and Standalone Primary Dealers. It will be the responsibility of the Board of each NBFC to make sure that the guidelines are adhered to.

New Guidelines on Liquidity Risk Management are as under:

  1. Small Maturity Buckets and Tolerance Limits

The 1-30 day time bucket in the Statement of Structural Liquidity is segregated into granular buckets of 1-7 days, 8-14 days 15-30 days. The cumulative mismatches in the maturity buckets of 1-7 days, 8-14 days and 15-30 days shall not exceed 10%, 10% and 20% of cash outflows in the respective time buckets. However, NBFCs are expected to keep a check on their cumulative mismatches of all time buckets throughout the year by establishing internal prudential limits with the approval of the Board. This granularity in time buckets would also apply to the interest rate sensitivity statement required to be submitted by NBFCs.

  1. Liquidity Risk Monitoring Tools

NBFCs shall adopt liquidity risk monitoring problems in liquidity position if any. Such monitoring tools shall cover the concentration of funding by counterparty/instrument/currency. Such tools also include certain early warning market-based indicators such as book-to-equity ratio, breaches and regulatory penalties for violations in regulatory liquidity requirements. The Board of NBFCs shall put in place the necessary internal monitoring mechanism in this regard.

  1. “Stock” approach to Liquidity

NBFCs are also mandated to monitor liquidity risk based on a “stock” approach to liquidity. This monitoring shall be the way of already defined internal limits as decided by the Board for various critical ratios pertaining to liquidity risk.

  1. Extension of liquidity Risk Management Principles

RBI[1] has decided to extend relevant principles to cover other aspects of monitoring of liquidity risk. These principles include off-balance-sheet and contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position management, and contingency funding plan.

Suggested Read: Loan Mela’s for NBFCs; Govt. Attempts to Boost Liquidity

Liquidity Coverage Ratio (LCR)

RBI also notified that all non-deposit taking NBFCs with asset size of RS 10,000 crore and above, and all deposit-taking NBFCs regardless of their asset size, shall maintain a liquidity buffer in terms of Liquidity Coverage Ratio (LCR). This liquidity buffer shall promote resilience of NBCs to potential liquidity disorders by ensuring that they have enough High Quality Liquid Asset (HQLA) to survive an acute liquidity stress scenario lasting for 30 days. The stock of HQLA to be maintained by the NBFCs shall be minimum 100% of total net cash outflows over the next 30 calendar days.

The new LCR requirement will be binding from December 2020 with the minimum high-quality liquid asset of 50% of LCR and reaching up to the required level of 100% by 2024.


Shubham Chauhan

A passionate legal content writer, a nature enthusiast, an avid reader, and a part-time thinker. By means of conducting in-depth research on industry related topics, Shubham often builds flawless and intelligible legal content for populace from all walks of life.

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