Refer - Business Standard
Enrich the answer from other sources, if the question demands.
K. V. A 5 years
Pls review
IAS Parliament 5 years
Good answer. Keep Writing.
guru 5 years
For providing regulatory oversight to NBFCs and CICs, RBI has drafted a LRMB. The need for regulation arose from the prevailing trend in NBFC sector wherein some NBFCs were financing their Long term obligations by short term instruments, which inevidently lead to liquidity crisis and consequent down gradation of NBFC profile. This made the banks particularly cautious of lending to the sector.The main motive behind LRMB is to improve liquidity condition of NBFCs(with specific focus on large NBFCs as well as deposit taking NBFCs) and consequently improve their standing with investors and banks. All large NBFCs and CICs are initially required to maintain 60% of their LCR in HQLA from April 1, 2020 and to take it to 100% by April 1, 2024. This move will ensure large NBFCs or Deposit taking NBFCs will have enough liquidity to support at least 3o days of outflow incase of a liquidity crisis, as one faced by IL&FS. For making sure Health of NBFC sector is sustained and providing much needed transparency , RBI directed firms to report publicly their liquidity standing and interest rate sensitivity statement to RBI.
For improving the internal asset-liability reporting on books, RBI had earlier required the NBFCs to appoint Chief Risk Officers. It also directed the firms to follow a granular approach for measuring their liquidity (in segments as minute as 1-8,8-14,15-30 days period). It directs that asset-liquidity mismatches should not exceed 10-20% in timeframes running upto to an year.This will boost confidence in banks for longer term lending as well as in long term investors.
IAS Parliament 5 years
Try to structure the answer well and establish some some link between the points. Emphasize the importance of Liquidity coverage ration in the answer. Keep Writing.
IAS Parliament 5 years
KEY POINTS
· The Reserve Bank of India’s (RBI’s) proposal to introduce liquidity buffers for non-banking financial companies (NBFCs) may restrict their ability to lend, but this short-term pain is necessary to make the sector more responsible.
· NBFCs did play a critical role by partially filling the vacuum created by the trouble in public sector banks (PSBs) and increasing their geographical reach via swift adoption of new technologies.
· The stringent guidelines, which are expected to improve liquidity management in NBFCs and cushion them against crises that arise from asset-liability mismatches, are necessary as the IL&FS crisis caused a lot of pain, especially among banks and mutual funds.
· Cleaning up of books and a clear idea of the asset-liability situation will give more confidence to lenders and make the sector healthy in the long run.
· LCR, maintained in high-quality liquid assets, ensures that financial institutions have enough liquidity to fall back on for 30 days in case of a significant liquidity stress.
· LCR requirement margin will impact NBFCs with longer-term products.
· A possible consequence of these measures is that weaker NBFCs with poor liquidity management will get absorbed into their larger counterparts to comply with the RBI’s liquidity buffer norms.
