The Reserve Bank of India (RBI) has issued proposed new guidelines to help the county’s non-banking finance companies (NBFCs) deal with severe liquidity problems.

The central bank’s proposals, if adopted, would see the phased introduction of a liquidity coverage ratio (LCR) regime in all of India’s deposit taking NBFCs and non-deposit taking shadow banks.

The RBI is keen to avoid a further debt crisis similar to that which afflicted India’s leading infrastructure IL&FS, which triggered panic in the markets last September when it defaulted on payments.

Motilal Oswal, India’s diversified financial services group and the country’s leading online share trading company, commented that if adopted the RBI guidelines would not impact earnings but ease liquidity as they focus on short-term liquidity management without any reforms on medium- to long-term funding management – as is the case with some Indian housing finance companies (HFCs)

“We don’t expect any material impact on earnings due to these guidelines,” the group added. “We continue to expect a few liquidity easing measures for NBFCs in ensuing months.”

Enhanced transparency

The RBI draft guidelines also cover the application of generic asset liability management (ALM) principles, granular maturity buckets in the liquidity statements and tolerance limits, liquidity risk monitoring tool and adoption of the ‘stock’ approach to liquidity. It also proposes enhancing transparency by increasing the borrower details on the liability side.

“Margins and return on asset (RoA) would be marginally impacted by the drag from excess liquidity,” a report commented. “ALM mismatches in the shorter duration buckets are typically more pronounced in the case of housing finance companies (HFCs) and corporate lenders, compared to other retail NBFCs and HFCs.”

The report added that the RBI’s 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, it suggested.