The Reserve Bank of India (“RBI”), on May 24, 2019, has released a draft circular pertaining to ‘Liquidity Risk Management Framework for Non-Banking Financial Companies and Core Investment Companies’ (“Draft Circular”) to be adopted by all deposit taking non-banking financial companies (“NBFC”), non-deposit taking NBFCs with an asset size of INR 100 crore and above and all core investment companies registered with the RBI. The Draft Circular has been introduced with a view to strengthen and raise the standard of asset liability management (“ALM”) framework applicable to NBFCs by revising the extant guidelines on liquidity risk management for NBFCs.

Following are some of the key features introduced by the Draft Circular:

 - Granular maturity buckets and tolerance limits

The 1 (one) – 30 (thirty) day time bucket in the Statement of Structural Liquidity is bifurcated into granular buckets of 1 (one) – 7 (seven) days, 8 (eight) – 14 (fourteen) days and 15 (fifteen)-30 (thirty) days. The net cumulative negative mismatches in the maturity buckets of 1 (one) – 7 (seven) days, 8 (eight) – 14 (fourteen) days and 15 (fifteen) – 30 (thirty) days should not exceed 10% (ten percent), 10% (ten percent)and 20% (twenty percent) of the cumulative cash outflows in the respective time buckets. All cumulative mismatches of a NBFC across all other time buckets up to 1 (one) year shall be monitored by such NBFC by establishing internal prudential limits with the approval of the board.

 - Liquidity risk monitoring tools

NBFCs, in order to capture strains in liquidity position, should adopt liquidity risk monitoring tools covering (a) concentration of funding by counterparty/ instrument/ currency, (b) availability of unencumbered assets that can be used as collateral for raising funds and (c) early warning market based indicators, such as, price to book ratio, coupon on debt raised and breaches and regulatory penalties for breaches in regulatory liquidity requirements. In this regard, the boards of NBFCs should put in place necessary internal monitoring mechanism.

 - ‘Stock’ approach to liquidity

NBFCs must monitor liquidity risk based on a stock approach to liquidity i.e. calculation and comparison of certain ratios (such as short term liability to total assets, short term liability to long term assets etc.) with the benchmarks pre-defined by the board. 

 - Liquidity coverage ratio

NBFCs not accepting deposits and having asset size of INR 50 billion and above and all deposit taking NBFCs are mandated to maintain a liquidity buffer in terms of a liquidity coverage ratio (“LCR”) by ensuring that they have sufficient high quality liquid asset to survive any acute liquidity stress scenario lasting for 30 (thirty) days. LCR requirement will be binding on NBFCs from April 1, 2020. Detailed guidelines on LCR including the disclosure standards are provided in the annexure B to the Draft Circular.