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Challenge to bring improvement in NBFC's working
It is believed that in the context of liquidity risk management, the proposed guidelines of Reserve Bank of India will reduce the profit of non-banking financial companies (NBFCs), which is going to be effective from 1st April, 2020.

After finalizing the proposed guidelines, the liabilities of NBFCs will be strictly monitored. Not only this, all the stakeholders involved in it will strictly adhere to the proposed guidelines.

NBFCs are constantly in crisis since the advent of IL & FS crisis in September last year. Their biggest problem is linked to liquidity. Due to lack of capital, the borrowing cost of NBFCs has increased. NBFCs' profits have also decreased due to the decrease in spread between deposit and borrowing. For survival in the market, NBFCs are lending for a short period, because short-term borrowing cost is low, while long-term borrowing cost is higher.

According to the Reserve Bank's proposed guidelines, NBFCs will have to manage asset-liability in a great way. In this context, lending for short periods such as 8 to 14 days or 15 to 30 days can be beneficial. The difference in cumulative asset-liability will also be 10 percent for 8 to 14 days and 20 percent for 15 to 30 days. Generally, when cash flow is more, then there is a difference between asset and liability.

Reserve Bank of India has also directed NBFC to maintain liquidity coverage ratio (LCR). LCR shows that the bank has high-quality liquid assets or not. NBFCs will be able to operate their business for a minimum of 30 days after having adequate assets.

According to the Reserve Bank, NBFCs should have adequate asset to meet the needs of the cash when needed. It means, NBFCs should have properties that can be converted into cash immediately. Not only this, NBFCs should also have sufficient amounts of asset to raises cash in the normal situation. NBFCs should also make their cash status public, so that investors can take right decision, in case of need.

It has been compulsory to comply with the LCR for NBFCs who have capital of Rs 5000 crore or more. Recently, the Reserve Bank has directed NBFCs to post a risk officer, which have capital of Rs 5,000 crore or more, so that they can manage risks in smooth way. According to the central bank, the maintenance of LCR will help NBFCs to deal with the problem of cash. It also will helpful in keeping high quality cash assets (HQLA). By the help of adopting such attempts, NBFCs will be able to do business for at least 30 days in case of crisis.  

The Reserve Bank has also said that till April 1, 2024, large NBFCs will have to maintain minimum 100 percent HQLA of net cash flow at least for the 30 days, while the obligation to keep LCR in context of NBFCs will be applicable from April 1, 2020. NBFCs will have to keep minimum 60 percent HQLA of LCR, which will be brought to 100 percent by April 1, 2024. In the proposed guidelines, NBFCs having assets of Rs 100 crore have been directed to check their cash on a short-term basis like from 1 to 7 days, 8 to 14 days, and 15 to 30 days.

Some NBFCs are considering acquiring banking license in light of the proposed changes. They are also negotiating with the central bank on the regulatory issues related to banking licenses. Presently, the application of a banking license of "Unimony Financial Services", the old name "UAE Exchange India", is pending with the Reserve Bank for approval. However, many NBFCs don't want to take a banking license. As per them, before the IL & FS crisis, the NBFCs business model was running well. In future too, it will run well, because, present crisis is temporary. Earlier, on April 2, 2014, a banking license was given to IDFC and Bandhan Bank. At that time, three industrial houses like Aditya Birla Nuvo, Bajaj Finserv and Reliance Capital applied for a banking license, out of which Bajaj Finserv got the license. However, later he had returned the license. Subsequently, the Reserve Bank issued license to 11 payment banks and 10 small finance banks.

Keeping in view above problems, large NBFCs are now trying to make their resources liquefied. In this light, NBFCs and Housing Finance companies are trying to raise funds from mutual funds through commercial papers, because at the present time the banks are avoiding investing in NBFCs due to their limitations and risks involved in NBFCs.

It can be said that due to the current business model of NBFCs, they have to face many problems. Actually, NBFCs borrow from Banks & other financial institutions for further giving loans to borrowers. NBFC's borrower cannot take loans from banks due to strict rules & regulations. Currently, after the drowning of IL & FS, banks and other financial institutions are reluctant to invest in NBFCs, due to which they have become deficient of capital. In such a situation, the Reserve Bank has issued guidelines to save NBFCs from the current crisis. In this scenario, NBFCs which are doing business of Rs 5000 core or more have been directed to appoint a risk officer, so that, in case of risk, NBFCs themselves can get out of crisis itself. It is expected that the latest guidelines issued by Reserve Bank in respect of NBFCs will be beneficial.

About the author: Satish Singh is currently working as Chief Manager in State Bank of India's Economic Research Department, Corporate Centre, Mumbai, and has been writing mainly on financial and banking topics for the last 10 years.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
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