RBI proposes stringent regulations for NBFCs

The Reserve Bank of India (RBI) has proposed stringent norms to strengthen and raise the standard of asset-liability management (ALM) framework of struggling non-banking financial companies (NBFCs).

Stringent Norms

• RBI proposes to introduce liquidity coverage ratio for all deposit-taking NBFCs and non-deposit taking NBFCs with an asset size of Rs 5,000 crore and above.
• Liquidity Risk Management Framework for NBFCs and Core Investment Companies (CICs) must be adopted by all deposit-taking and non-deposit taking NBFCs with an asset size of Rs 100 crore and above and all CICs registered with the RBI.
• The 1-30 day time bucket in the Statement of Structural Liquidity will be bifurcated into granular buckets of 1-7 days, 8-14 days, and 15-30 days. The net cumulative negative mismatches in the maturity buckets of 1-7 days, 8-14 days, and 15-30 days should not exceed 10 per cent, 10 per cent and 20 per cent of the cumulative cash outflows in the respective time buckets
• NBFCs are also mandated to monitor liquidity risk by way of predefined internal limits as decided by the board for various critical ratios pertaining to liquidity risk.
• RBI has proposed to extend relevant principles covering other aspects of monitoring and measurement of liquidity risks like off-balance sheet and contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position management and contingency funding plan.

NBFCs play an important role in the financial system of the country especially in delivering credit to the last mile. NBFCs’ ability to perform their role effectively and efficiently requires them to be financially resilient, well-regulated and properly governed. Hence RBI has proposed stringent norms.