LCR Applicability to following NBFC
- Category 1: All Deposit taking NBFCs (Annexure A & B both)
- Category 2: Non-Deposit taking NBFCs whose asset size is more than 5,000 crores (Annexure A and B both).
- Category 3: Non-deposit taking NBFCs with asset size of Rs. 100 crore and above (Annexure A).
Annexure A (Non-deposit taking NBFCs with asset size of Rs.100 crore and above, systemically important Core Investment Companies and all deposit taking NBFCs irrespective of the asset size).
A. Liquidity Risk Management Policy, Strategies and Practices
Board of the NBFC shall frame a liquidity risk management framework which ensures that it maintains sufficient liquidity including a cushion of unencumbered, high quality liquid assets to withstand a range of stress events.
It shall spell out the entity-level liquidity risk tolerance; funding strategies; prudential limits; system for measuring, assessing and reporting/ reviewing liquidity; framework for stress testing; liquidity planning under alternative scenarios/formal contingent funding plan; nature and frequency of management reporting; periodical review of assumptions used in liquidity projection; etc
Key elements of the liquidity risk management framework are as under
- Governance of Liquidity Risk Management-involved in the process of identification, measurement and mitigation of liquidity A desirable organisational set up for liquidity risk management should be as under:
- Board of Directors,Risk Management Committee, Asset-Liability Management Committee, Asset Liability Management (ALM) Support Group.
- Liquidity risk Tolerance-An NBFC shall have a sound process for identifying, measuring, monitoring and controlling liquidity risk
- Liquidity Costs, Benefits and Risks in the Internal Pricing- NBFCs should endeavour to 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
- Off-balance Sheet Exposures and Contingent Liabilities- The process of identifying, measuring, monitoring and controlling liquidity risk should include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons
- Funding Strategy - Diversified Funding
- Collateral Position Management
- Stress Testing- Stress testing shall form an integral part of the overall governance and liquidity risk management culture in NBFCs
- Contingency Funding Plan-A n NBFC shall formulate a contingency funding plan (CFP) for responding to severe disruptions which might affect the NBFC’s ability to fund some or all of its activities in a timely manner and at a reasonable cost.
B. Management Information System (MIS)
An NBFC shall have 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.
C. Internal Controls
An NBFC shall have appropriate internal controls, systems and procedures to ensure adherence to liquidity risk management policies and procedure. Management should ensure that an independent party regularly reviews and evaluates the various components of the NBFC’s liquidity risk management process.
D. Maturity Profiling
For measuring and managing net funding requirements, the use of a maturity ladder and calculation of cumulative surplus or deficit of funds at selected maturity dates is adopted as a standard tool. The Maturity Profile should be used for measuring the future cash flows of NBFCs in different time buckets
E. Liquidity Risk Measurement - Stock Approach
NBFCs shall adopt a "stock" approach to liquidity risk measurement and monitor certain critical ratios in this regard by putting in place internally defined limits as approved by their Board. The ratios and the internal limits shall be based on an NBFC’s liquidity risk management capabilities, experience and profile
F. Currency Risk
Exchange rate volatility imparts a new dimension to the risk profile of an NBFC’s balance sheets having foreign assets or
G. Managing Interest Rate Risk (IRR)
NBFCs shall manage interest rate risk as per the extant regulatory
H. Liquidity Risk Monitoring Tools
Annexure B
In addition to the guidelines laid down in Annex A of these guidelines, all non-deposit taking systemically important NBFCs with asset size of Rs. 5,000 crore and above and all deposit-taking NBFCs irrespective of the asset size.
1. Liquidity Coverage Ratio (LCR)
Stock of High Quality liquid Assest (HQLAs)/ Total net cash outflow over the next 30 calendar days
The LCR requirement shall be binding on all 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, with the minimum LCR to be 70%, progressively increasing, till it reaches the required level of 100%, by December 1, 2024.
2. Provided that NBFCs shall have the option to use their stock of HQLA, thereby allowing LCR to fall below 100% during a period of financial
3. Assets to be included in the computation of HQLAs, Depending upon the nature of assets, they have been assigned different haircuts below, which are to be applied while calculating the HQLA for the purpose of calculation of The assets and the haircuts are as under:
I. Assets to be included as HQLA without any haircut
- Cash (In Hand and deposit with banks)
- Government securities
- Marketable securities issued or guaranteed by foreign sovereigns satisfying all the following conditions:
- Assigned a 0% risk weight by banks under standardized approach for credit risk;
- Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions.
- Not issued by a bank/financial institution/NBFC or any of its affiliated entities.
II. Assets to be considered for HQLA with a minimum haircut of 15%
- Marketable securities representing claims on or claims guaranteed by sovereigns, Public Sector Entities (PSEs) or multilateral development banks that are assigned a 20% risk weight by banks under standardized approach for credit risk and provided that they are not issued by a bank/financial institution/NBFC or any of its affiliated
- Corporate bonds, not issued by a bank/financial institution/NBFC or any of its affiliated entities, which have been rated AA- or above by an eligible credit rating
- Commercial Papers not issued by a bank/PD/financial institution or any of its affiliated entities, which have a short-term rating equivalent to the long-term rating of AA- or above by an eligible credit rating
III. Assets to be considered for HQLA with a minimum haircut of 50%
i. Marketable Securities representing claims on or claims guaranteed by sovereigns having risk weights higher than 20% but not higher than 50%, i.e., they should have a credit rating not lower than BBB- as prescribed for banks in India.
ii. Common Equity Shares which satisfy all of the following conditions:
- not issued by a bank/financial institution/NBFC or any of its affiliated entities;
- included in NSE CNX Nifty index and/or S&P BSE Sensex index.
iii. Corporate debt securities (including commercial paper) and the securities having usual fundamental and market-related characteristics for HQLAs and meeting the following conditions:
- not issued by a bank, financial institution, PD, NBFC or any of its affiliated entities;
- have a long-term credit rating from an eligible credit rating agency between A+ and BBB- or in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating;
- traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
- have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, i.e. a maximum decline of price not exceeding 20% or increase in haircut over a 30-day period not exceeding 20 percentage points during a relevant period of significant liquidity stress.
4. For the purpose of computing LCR for deposit-taking NBFCs, such unencumbered approved securities held as per the provisions of section 45 IB of RBI Act, would be reckoned as HQLA only to the extent of 80% of the required holding.
5. Total net cash outflows
Total net cash outflows is defined as the total expected cash outflows minus total expected cash inflows for the subsequent 30 calendar days. Considering the unique nature of the balance sheet of the NBFCs, stressed cash flows is computed by assigning a predefined stress percentage to the overall cash inflows and cash outflows. Total expected cash outflows (stressed outflows) are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by 115% (15% being the rate at which they are expected to run off further or be drawn down). Total expected cash inflows (stressed inflows) are calculated by multiplying the outstanding balances of various categories of contractual receivables by 75% (25% being the rate at which they are expected to under-flow). However, total cash inflows will be subjected to an aggregate cap of 75% of total expected cash outflows. In other words, total net cash outflows over the next 30 days = Stressed Outflows - Min (stressed inflows; 75% of stressed outflows).
6. NBFCs will not be permitted to double count items, i.e., if an asset is included as part of the "stock of HQLA" (i.e., the numerator), the associated cash inflows cannot also be counted as cash inflows (i.e., part of the denominator). Where there is potential that an item could be counted in multiple outflow categories (e.g., committed liquidity facilities granted to cover debt maturing within the 30 calendar day period), an NBFC only has to assume up to the maximum contractual outflow for that product.
7. Data must be presented as simple averages of monthly observations over the previous quarter (i.e., the average is calculated over a period of 90 days). However, with effect from the financial year ending March 31, 2022, the simple average shall be calculated on daily observations.
8. LCR Disclosure Standards
A. NBFCs are 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.
B. In addition to the disclosures required by the format, NBFCs should provide sufficient qualitative discussion (in their annual financial statements under Notes to Accounts) around the LCR to facilitate understanding of the results and data provided. For example, where significant to the LCR, NBFCs could discuss:
(a) the main drivers of their LCR results and the evolution of the contribution of inputs to the LCR’s calculation over time;
(b) intra- period changes as well as changes over time;
(c) the composition of HQLAs;
(d) concentration of funding sources;
(e) derivative exposures and potential collateral calls;
(f) currency mismatch in the LCR;
(g) other inflows and outflows in the LCR calculation that are not captured in the LCR common template but which the institution considers to be relevant for its liquidity profile.
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