InvestorQ : What is RBI’s new policy for NBFC?
Anamika Sodhani made post

What is RBI’s new policy for NBFC?

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rhea Babu answered.
10 months ago

I suppose you are talking about NBFCs being brought under the liquidity framework of the RBI, which was announced on 05th November 2019. First let me share the key highlights of the new announcement.

· Liquidity coverage rules have now been extended by the RBI to all deposit-accepting non-banking finance companies (NBFCs), large non-banks (even if they don’t accept deposits) as well as systemically important core investment companies. This move is intended to prevent a squeeze in the financial system. Large non-banks have been defined by the RBI as any NBFC with asset size of more than Rs.100 crore and that virtually puts most of the mid-sized NBFCs also in this monitoring list. However, non-operating financial holding companies have been exempted from the liquidity framework.

· The statement of structural liquidity is being made more granular. In short, the 1-30 day time bucket (for payments) will now have to be segregated into multiple sub-buckets of 1-7 days, 8-14 days, and 15-30 days. This will avoid a very generic classification of risk in the case of NBFCs. The above finer classification will also apply to the interest rate sensitivity statement submitted by NBFCs

· Now, NBFCs will be statutorily expected to monitor their cumulative mismatches (running total) across all other time buckets up to one year by establishing prudential limits. Such limits will have to approved and signed off by the board of the NBFC.

· In addition, the RBI has also stipulated that the cumulative negative mismatches between payments and receivables in the maturity buckets of 1-7 days, 8-14 days and 15-30 days shall not exceed 10-20 per cent of the cumulative cash outflows in respective time buckets

· Under the new prudential guidelines laid out by the RBI, NBFCs will also be required to monitor liquidity risk based on a “stock” approach to liquidity and based on internal limits. Again such limits will have to be explicitly approve and signed off by the Board.

· RBI has also extended the regulations to encompass other aspects of monitoring of liquidity risk, viz. In addition, the regulations also cover off-balance sheet items and contingent liabilities.

· RBI has also put in place a detailed framework for stress testing, intra-group fund transfers, diversification of funding, collateral management and sufficiency as well as a contingency funding plan.

If you look at the gist of the RBI announcements on November 05th pertaining to the risk management and monitoring of NBFCs, it is comprehensive and also granular. The idea is to avoid sudden negative surprises as in the case of systematically important NBFCs like IL&FS and Dewan Housing that we saw last time.