The Reserve Bank of India on Friday released draft rules proposing to tighten the liquidity framework for the country’s non-banking financial companies.
The net cumulative negative mismatches in the maturity buckets 1-7 days, 8-14 days, and 15-30 days buckets should not exceed 10 percent, 10 percent and 20 percent of the cumulative cash outflows in the respective time buckets.RBI Draft Rules
Ideally, a financial company should have no negative mismatch as it would mean that there is an urgent need for refinancing. As such, the RBI permitting some negative mismatch may not go a long way in tightening the rules for NBFCs.
Stronger Governance, Increased Disclosures
The central bank also proposed a stronger governance structure for managing liquidity mismatches.
The board of directors shall have overall responsibility for management of liquidity risk. “The board should decide the strategy, policies and procedures of the NBFC to manage liquidity risk in accordance with the liquidity risk tolerance/limits decided by it,” said RBI. The risk management committee, which reports to the board, shall be responsible for evaluating the overall risks faced by the NBFCs, including liquidity risk, RBI said.
Besides, NBFCs must make extensive disclosures from here on. These disclosures include:
- Funding concentration based on significant counter-parties.
- Top 20 large deposits.
- Top 10 borrowings.
- Funding concentration based on significant instrument/products.
- Exposure to CPs, NCDs and other short term liabilities.
Who The Rules Apply To
The rules will be applicable to NBFCs and core investment companies, the RBI said.
In case of NBFCs, the proposed RBI norms, once finalised, will apply to all deposit-taking NBFCs and non-deposit-taking NBFCs with an asset size of at least Rs 100 crore. For core investment companies, the rules will be applicable to all those registered with RBI.
The central bank has sought feedback till June 14 before framing the final rules.
“On the face of it, the guidelines seem to be positive for the NBFC sector since it will bring in some formal management of the liquidity framework that these companies used to run,” Karthik Srinivasan, head (financial sector ratings) at ICRA, said. “ NBFCs that were earlier playing the regulatory arbitrage would be forced to follow a more formal framework. With additional supervision of the RBI, the current issues can be better addressed.”
RECOMMENDED FOR YOU
POPULAR
