Reserve Bank releases draft circular on NBFC liquidity risk management framework after IL&FS, DHFL cash crunch

The Reserve Bank of India (RBI) on Friday issued a draft circular on liquidity risk management framework for non-banking financial companies and core investment companies.

The central bank said that the recent developments in the NBFC sector pointed to the need for a stronger Asset Liability Management (ALM) framework in the NBFCs.

"While some of the current regulatory prescriptions applicable to NBFCs on ALM framework have been updated/recast, certain new features have been added. Among others, the draft guidelines cover application of generic ALM principles, granular maturity buckets in the liquidity statements and tolerance limits, liquidity risk monitoring tool and adoption of the “stock” approach to liquidity," RBI said in a notification on Friday.

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, the central bank said.

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

 Reserve Bank releases draft circular on NBFC liquidity risk management framework after IL&FS, DHFL cash crunch

Representational image. Reuters.

On Wednesday, sources said RBI was not in favour of providing special credit window to the NBFC sector to tide over the liquidity crunch as the cash crunch phenomenon is not systemic.

Industry players and government think-tank NITI Aayog made a case for giving special credit window for non-banking financial companies (NBFCs) facing liquidity crunch following default by a group of companies of IL&FS since September 2018.

Many NBFCs, including DHFL and Indiabulls Finance, came under severe liquidity pressure compelling them to bring down their reliance on commercial papers.

Ever since the IL&FS crisis erupted, banks have been averse to lending to the sector, which has put them in a tight spot. There are concerns that NBFCs may run out of money, which will lead to defaults.

According to the sources, the Reserve Bank of India (RBI) is of the view that special window is not required as of now based on their assessment. The central bank feels that the cash crunch is not a sector-specific phenomenon but limited to a few large NBFCs which have over-leveraged due to aggressive lending.

With PTI inputs

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Updated Date: May 24, 2019 20:24:59 IST