Applicability

1. Non-deposit taking NBFCs with asset size of Rs.100 crore and above
2. Systemically important Core Investment Companies
3. Deposit taking NBFCs irrespective of their asset size

All other NBFCs are also encouraged to adopt these guidelines on liquidity risk management on voluntary basis

Exclusion:

1. Type 1 NBFC-NDs- NBFC-ND not accepting public funds/ not intending to accept public funds in the future andnot having customer interface/ not intending to have customer interface in the future
2. Non-Operating Financial Holding Companies and Standalone Primary Dealers

Action to be taken:

The Board of Directors must revise the existing ALM policy or adopt a new LRM Framework to put in place internal monitoring mechanism for the following:

• Adopt liquidity risk monitoring tools/metrics to cover
  1. concentration of funding by significant counterparty/ instrument/ currency[1],
  2. availability of unencumbered assets that can be used as collateral for raising funds; and,
  3. certain early warning market-based indicators, such as, book-to-equity ratio, coupon on debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirement.
  4. The Board / committee set up for the purpose shall monitor on a monthly basis, the movements in their book-to-equity ratio for listed NBFCs and the coupon at which long-term and short-term debts are raised by them. This also includes information on breach/penalty in respect of regulatory liquidity requirements, if any.
• Monitor liquidity risk based on a “stock” approach to liquidity
  • Board to set predefined internal limits for various critical ratios pertaining to liquidity risk.
  • Indicative liquidity ratios are
    • short-term liability to total assets;
    • short-term liability to long-term assets;
    • commercial papers to total assets;
    • non-convertible debentures (NCDs) (original maturity less than one year) to total assets;
    • short-term liabilities to total liabilities; long-term assets to total assets.
  • Put in place process for identifying, measuring, monitoring and controlling liquidity risk.
    • It should clearly articulate a liquidity risk tolerance that is appropriate for its business strategy and its role in the financial system
    • Senior management should develop the strategy to manage liquidity risk in accordance with such risk tolerance and ensure that the NBFC maintains sufficient liquidity
  • Develop a process to quantify liquidity costs and benefits so that the same may be incorporated in the internal product pricing, performance measurement and new product approval process for all material business lines, products and activities.
  • Conduct stress tests on a regular basis for a variety of short-term and protracted NBFC-specific and market-wide stress scenarios (individually and in combination)
  • Ensure that an independent party regularly reviews and evaluates the various components of the NBFC’s liquidity risk management process

Revision in the existing ALM framework to incorporate granular buckets

As per the existing norms, the mismatches (negative gap) during 1-30/31 days in normal course shall not exceed 15% of the cash outflows in this time bucket. Pursuant to the revised framework, the 1-30 day time bucket in the Statement of Structural Liquidity is segregated 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 shall not exceed 10%, 10% and 20% of the cumulative cash outflows in the respective time buckets.

Revision in interest rate sensitivity statement

Granularity in the time buckets would also be applicable to the interest rate sensitivity statement required to be submitted by NBFCs.

Composition of Risk Management Committee

The Risk Management Committee, which reports to the Board and consisting of Chief Executive Officer (CEO)/ Managing Director and heads of various risk verticals shall be responsible for evaluating the overall risks faced by the NBFC including liquidity risk.

Asset Liability Management (ALM) Support Group

The existing Management Committee of the Board or any other Specific Committee constituted by the Board to oversee the implementation of the system and review its functioning periodically shall be substituted with ALM Support Group. It shall consist of operating staff who shall be responsible for analysing, monitoring and reporting the liquidity risk profile to the ALCO. Such support groups will be constituted depending on the size and complexity of liquidity risk management in an NBFC.

Public Disclosure

To enable market participants to make an informed judgment about the soundness of its liquidity risk management framework and liquidity position-

1. Disclose information in the format provided under Appendix I, on a quarterly basis on the official website of the company and
2. In the annual financial statement as notes to account

Responsibility of Group CFO

The Group Chief Financial officer (CFO) shall develop and maintain liquidity management processes and funding programmes that are consistent with the complexity, risk profile, and scope of operations of the ‘companies in the Group’- as defined in the Master Directions.

MIS System

Put in place a reliable MIS designed to provide timely and forward-looking information on the liquidity position of the NBFC and the Group to the Board and ALCO, both under normal and stress situations.

Liquidity Coverage Ratio- Snapshot

Applicability:

1. Non-deposit taking NBFCs with asset size of Rs.5,000 crore and above,
2. Deposit taking NBFCs irrespective of their asset size

Exclusion:

1. Core Investment Companies,
2. Type 1 NBFC-NDs,
3. Non-Operating Financial Holding Companies and Standalone Primary Dealer

Computation:

Liquidity Coverage Ratio (LCR) is represented by the following ratio:

Stock of High Quality Liquid Assets (HQLA)/ Total net cash outflows over the next 30 calendar days

Here, “High Quality Liquid Assets (HQLA)” means liquid assets that can be readily sold or immediately converted into cash at little or no loss of value or used as collateral to obtain funds in a range of stress scenarios.

Timeline:

Effective date of implementation of the LCR norm is December 01, 2020, as per the timeline mentioned herein below. The LCR shall continue to be minimum 100% (i.e., the stock of HQLA shall at least equal total net cash outflows) on an ongoing basis with effect from December 1, 2024, i.e., at the end of the phase-in period.

1. For non-deposit taking systemically important NBFCs with asset size of Rs.10,000 crore and above and all deposit taking NBFCs irrespective of the asset size, LCR to be maintained as per the following timeline:

2. For non-deposit taking NBFCs with asset size of Rs. 5,000 crore and above but less than Rs. 10,000 crore, the required level of LCR to be maintained, as per the time-line given below:

Disclosure Requirements:

NBFCs shall be required to disclose information on their LCR every quarter. Further, NBFCs in their annual financial statements under Notes to Accounts, starting with the financial year ending March 31, 2021, shall disclose information on LCR for all the four quarters of the relevant financial year.

[1] A “Significant counterparty” is defined as a single counterparty or group of connected or affiliated counterparties accounting in aggregate for more than 1% of the NBFC-NDSI’s, NBFC-Ds total liabilities and 10% for other non-deposit taking NBFCs

A “significant instrument/product” is defined as a single instrument/product of group of similar instruments/products which in aggregate amount to more than 1% of the NBFC-NDSI’s, NBFC-Ds total liabilities and 10% for other non-deposit taking NBFCs.

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