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RBI steps in to shield NBFC depositors


MUMBAI: To give protection to lenders and depositors of non-bank finance firms, RBI plans to get large NBFCs to put money into executive bonds or deposits to ensure that they have got sufficient to make repayments for one month if budget dry up due to a liquidity disaster.

RBI on Friday notified a draft liquidity possibility control framework for NBFCs. This comes at a time when a couple of large lenders skilled a cash crunch forcing them to scramble for budget. The liquidity possibility control rules will observe to all financial establishments with an asset size of Rs 100 crore and above.


It may also observe to systemically vital core investment firms and all deposit-taking NBFCs. The proposed rules prescribing a liquidity coverage ratio (LCR), which is able to observe to finance firms with assets of over Rs 5000 crore.

Under the LCR tips, finance firms will need to make sure that their borrowings broadly fit the maturity of their loans.

The NBFCs must deal with a part of their budget in “fine quality liquidity assets” in a gradual way. These fine quality liquidity assets will also be cash deposits, executive bonds and even extremely rated bonds.

These rules will tighten liquidity for finance firms as they are able to now lend a smaller a part of the budget they mobilise. The good news is that it will occur over a time frame as RBI has provided a flow trail where the finance firms must comply with 60% of the liquidity coverage norms via April 2020 which is able to build up via 10 percentage points every year thereafter to 100% in April 2024. Earlier, RBI had taken a reasonably more lenient manner in regulating NBFCs as they had been depending in large part on wholesale traders. However, recent events confirmed that even wholesale borrowings via finance firms could impact small traders.


Deadline: 2020-2024

A large a part of the money that had long gone into bonds issued via finance firms got here from mutual fund schemes. Many schemes took a big hit when IL&FS Financial Services – a registered NBFCs — reneged on its commitments.


The requirement for NBFCs to deal with fine quality liquidity reserves brings them nearer to banks in relation to rules. Banks must deal with a part of their deposits in cash reserves with RBI and in executive bonds below the statutory liquidity ratio requirement. RBI had ultimate week announced that it might rejig its supervisory function to create a different cadre that can take a look at all financial establishments, together with banks and NBFCs.


The proposed tips have been issued after “an research of the hot tendencies within the NBFC sector”, mentioned the RBI without naming any specific NBFC. Among others, the draft tips additionally cover the applying of generic asset liability control (ALM) ideas and liquidity possibility tracking gear.


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