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Draft guidelines for ALM and LCR requirements of NBFCs
Increases transparency | Profit neutral
The Reserve Bank of India’s (RBI) draft guidelines on the liquidity risk management framework for NBFCs aim to
(a) strengthen the ALM processes with more focus on granular short-duration buckets,
(b) address the acute liquidity stress scenario over a one-month period by introducing LCR requirements (akin to Banks) and
(c) enhance transparency via increasing the borrower/concentration details on the liability side.
* Post the liquidity crisis in Sep’18, most NBFCs increased liquidity (8-10% of borrowings) on the balance sheet to address any potential ALM issues. Consequently, achieving the LCR requirements (as described below) should not be a challenge in the current context. However, margins and RoA would be marginally impacted by the drag from excess liquidity.
* ALM mismatches in the shorter-duration buckets are typically more pronounced in the case of HFCs and corporate lenders, compared to other retail NBFCs and MFIs.
* The 1-30 day bucket in the ‘Statement of Structural Liquidity’ has now been bifurcated into granular buckets of 1-7 days, 8-14 days and 15-30 days. This increased monitoring is likely to prove beneficial over the longer term. The guidelines are positive from the longer-term perspective and should also enhance transparency. However, it focuses solely on short-term liquidity management without any reforms on medium- to long-term funding management, as is the case with some HFCs. We don’t expect any material impact on earnings due to these guidelines. We continue to expect a few liquidity easing measures for NBFCs in ensuing months. In addition, we expect NHB to come out with similar guidelines for HFCs soon.
Introducing LCR for NBFCs
NBFCs with asset size of INR50b+ shall maintain a liquidity buffer in terms of LCR (akin to banks). LCR facilitates resilience to potential liquidity disruptions by ensuring sufficient high quality liquid asset (HQLA) to survive any acute liquidity stress scenario lasting for 30 days. The stock of HQLA to be maintained by the NBFCs shall be minimum of 100% (Phasing out - 60% in April 2020 to 100% by April 2024) of total adjusted net cash outflows over the next one month. According to our calculations, most NBFCs are sitting on excess liquidity on the balance sheet, and thus, achieving the LCR targets would not be an issue for them. However, over the long term, it could pressurise profitability due to the negative carry from excess liquidity.
Further granularising ALM mismatches
The current 1-30 day time bucket in the Statement of Structural Liquidity is 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%, 10% and 20% of cumulative cash outflows in the respective time buckets v/s the current guideline of 15% in up to one month/year bucket.
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