The Reserve Bank of India (RBI) has made changes in the extant guidelines pertaining to liquidity risk management for non-banking finance companies (NBFCs) in a bid to level-up and raise the standard of asset liability management (ALM) framework applicable to them.
All the non-deposit taking NBFCs with an asset size of Rs 100 crore and higher, systemically important core investment companies and all deposit accepting NBFCs irrespective of their asset size will segregate the 1-30 day timeline in the statement of structural liquidity into granular buckets of 1-7 days, 8-14 days, and 15-30 days.
The net cumulative negative discrepancies in the maturity buckets of 1-7 days, 8-14 days, and 15-30 days shall not inflate 10 percent, 10 percent and 20 percent of the cumulative cash outflows in the respective time buckets.
The NBFCs should inculcate liquidity risk monitoring tools/metrics in a bid to capture strains in liquidity position, if any, said RBI.
Such monitoring mechanisms shall cover a) concentration of funding by counterparty/ instrument/ currency, b) availability of unencumbered assets that can be used as collateral for raising funds; and, c) certain early warning market-based indicators, namely, book-to-equity ratio, coupon on debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements, it said.
Further, the measurement of structural and dynamic liquidity, NBFCs are also directed to keep an eye on the liquidity risk based on a “stock” approach to liquidity, added the central bank.
The monitoring shall be predefined internal limits as framed by the board for various critical ratios pertaining to liquidity risk.
“In addition to the liquidity risk management principles underlining extant prescriptions on key elements of ALM framework, it has been decided to extend relevant principles to cover other aspects of monitoring and measurement of liquidity risk,” RBI said in a release.