NBFC

Safe custody of liquid assets and collection of interest by NBFC on SLR securities

As a regulatory requirement, an NBFC’s operations must include the safe custody of liquid assets and the collection of interest on securities with a Statutory Liquid Ratio (SLR). It is a regulatory obligation that NBFC should keep some of its assets in liquid form. In order to meet the company’s liquidity demands and to guarantee the security of depositors’ money, these liquid assets act as a buffer.

To ensure the safe custody of liquid assets, an NBFC typically follows the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Direction, 2016. Let us discuss the safe custody of liquid assets and collection of interest by NBFC on statutory liquid ration securities in detail.

Liquid Asset

If an asset can be easily sold or converted into cash without any loss in value, it is said to be liquid. A liquid asset is anything you own, which can be quickly turned into cash (within 90 days). Cash, checking or savings accounts, as well as some kinds of investments, are assets that might be regarded as liquid assets. 

To determine a company’s net worth, all the liquid assets are added together, and the liabilities are deducted. While knowing your net worth is significant, liquid assets are even more crucial since they show you how much money you can access if you find yourself in a tight place.

Statutory Liquid Ratio

Statutory Liquidity Ratio, or SLR, is the minimum amount of deposits that a commercial bank and NBFCs must keep on hand in the form of cash, gold, and other assets. However, rather than being held by the Reserve Bank of India, these deposits are kept by the banks themselves.

How does Statutory Liquidity Ratio work?

By the end of the day, each bank must have a specific amount of their Net Demand and Time Liabilities (NDTL) in the form of cash, gold, or other liquid assets. The Statutory Liquidity Ratio (SLR) is the proportion of these liquid assets to the demand and time liabilities. 

The bank’s capacity to inject money into the economy is hampered by an increase in the ratio. In order to maintain price stability and control the money flow in the Indian economy, RBI is in charge of these tasks. One of its many monetary policies for the same is the Statutory Liquidity Ratio. SLR plays a crucial role in safeguarding the banks’ viability and the economy’s cash flow, among other tools.  

CSGL Account

Most government securities are issued as stocks and kept in demat form to the holder’s credit in the subsidiary general ledger account (SGL) kept in the RBI’s accounts. When an investor holds these assets through a third party, such as a bank or PD, that third party maintains a separate SGL account with the RBI for the purpose of holding the government securities that belong to its clients. This second account, known as the Constituent Subsidiary General Ledger account (CSGL), is a segregated SGL account used by banks and primary dealers to hold securities on behalf of consumers.

Safe Custody of Liquid Assets / Collection of Interest on SLR Securities

1. Every non-banking financial company must open the following account according to the RBI Direction, which is discussed below:

• Open a Constituent’s Subsidiary General Ledger (CSGL) account with a scheduled commercial bank or the Stock Holding Corporation of India Ltd. (SHCIL) or a dematerialised account with a depository through a depository participant registered with the Securities and Exchange Board of India¹ and maintain the unencumbered approved securities required to be maintained by it in accordance with section 45-IB of the RBI Act.

• Designate one of the scheduled commercial banks in the location of the non-banking financial company as its designated banker and entrust in physical form the unencumbered term deposits in any scheduled commercial bank that the non-banking financial company maintains in accordance with the directions specified in the master direction of acceptance of public deposit (Requirement of maintenance of liquid assets) as well as such unencumbered approved securities that have not been dematerialised to that bank or the SHCIL;

• They should intimate this in writing to the Regional Office of the Reserve Bank, under whose jurisdiction the registered office of the company is as per the location. The following should be intimated:
  • The name and address of such scheduled commercial bank where it opened its CSGL account or held the securities in physical form.
  • The location of the SHCIL where it did the same, or the depository (and the depository participant) where it held its dematerialised account.
  • Non-Banking Financial Companies who intend to entrust the securities at a place other than the specified place at which its registered office is situated it may do so with the prior written consent of the Regional Office of the Bank under whose jurisdiction the company’s registered office is located.
  • Furthermore, the government securities held in the aforementioned CSGL account or dematerialised account may not be traded, except in accordance with the procedure and to the extent, of entering into ready-forward contracts, including reverse ready-forward contracts.

2. The securities, as directed in the regulation, must be kept in the manner specified for the benefit of the depositors and may not be withdrawn, encashed, or otherwise dealt with by the non-banking financial company, except for repayment to the depositors with the Reserve Bank of India’s prior approval. However,

3. The non-banking financial company must open a separate CSGL or dematerialised account to hold any excess government securities if it plans to trade in them, whether through ready-forward contracts, including reverse ready-forward contracts or in any other way. It is required by section 45-IB of the Act and the instructions specified in Chapter III of the RBI directions.

4. To comply with section 45-IB of the Act, securities must be kept in an exclusive CSGL or Demat account to retain government securities to safeguard depositors’ interests. This account may only be used to buy or sell securities in response to changes in the number of public deposits or to remove securities for eventual maturity or repayment to depositors under unusual circumstances.

5. Some government securities and government-guaranteed bonds that are held in physical form and have not been dematerialised will be taken out of safekeeping with their designated bankers in order to collect interest before being re-deposited with the banks. 

The non-banking financial firm authorises the authorised banks to act as collection agents for the interest on due dates on these securities maintained in physical form and lodged for safekeeping in order to prevent the procedure of withdrawal and re-depositing. When the interest on the securities or guaranteed bonds is due in physical form, the Non-Banking Financial Company may go to its designated banker and exercise a Power of Attorney in favour of the designated bank.

Conclusion

To ensure the safe custody of the liquid assets and to effectively collect interest on statutory liquid ratio securities, NBFC should abide by regulatory requirements and keep adequate procedures and controls in place. This helps the NBFC fulfil its legal responsibilities, control liquidity, and maximise investment profits.

Read our Article: Why Do NBFCs Have To Maintain Liquidity Coverage Ratio And High-Quality Liquid Assets?

1. https://www.sebi.gov.in/