Guidelines on Liquidity Risk Management Framework

Guidelines on Liquidity Risk Management Framework

Non-deposit taking NBFCs with assets of ₹100 crore and above, Core Investment Companies, and all deposit-taking NBFCs must follow these guidelines. The Board is responsible for ensuring compliance. These guidelines are also recommended for other NBFCs. They cover various aspects of liquidity risk management, including policy, management information systems, internal controls, and monitoring tools.

Liquidity Risk Management Policy, Strategies, and Practices

A strong liquidity risk management system is essential. The Board should develop a framework that maintains enough liquidity to handle stress events. This framework should include the entity’s liquidity risk tolerance, funding strategies, limits, measurement and assessment systems, stress testing, and management reporting.

Governance of Liquidity Risk Management

Effective risk management starts at the top. The Chief Risk Officer plays a key role in identifying, measuring, and mitigating liquidity risks. The organizational setup should include:

  • The Board of Directors, responsible for overall liquidity risk management.
  • The Asset-Liability Management Committee (ALCO), ensuring adherence to risk limits and implementing strategies.
  • The Asset-Liability Management (ALM) Support Group, analysing, monitoring, and reporting liquidity risk.

Liquidity Risk Tolerance

NBFCs must have a clear process for handling liquidity risk. This includes setting a risk tolerance that aligns with their business strategy.

Liquidity Costs, Benefits, and Risks in Internal Pricing

NBFCs should quantify liquidity costs and benefits for product pricing and performance measurement.

Off-balance Sheet Exposures and Contingent Liabilities

A robust framework is needed to project cash flows from off-balance sheet items. Special attention should be given to exposures from special purpose vehicles, financial derivatives, and guarantees.

Funding Strategy

NBFCs should diversify their funding sources and maintain a presence in funding markets. They should avoid over-reliance on any single funding source.

Collateral Position Management

NBFCs need to actively manage their collateral, ensuring they have enough for borrowing needs and margin requirements.

Stress Testing

Regular stress tests for various scenarios are crucial. These tests should reflect the NBFC’s specific business and vulnerabilities.

Contingency Funding Plan

NBFCs should have a plan for severe disruptions, detailing potential funding sources and activation procedures.

Public Disclosure

NBFCs must disclose information quarterly on their website and in annual financial statements about their liquidity risk management and position.

Intra Group Transfers

The Group CFO should manage liquidity risks arising from intra-group transactions, ensuring adequate liquidity across the group.

Management Information System (MIS)

NBFCs need a reliable MIS that provides timely information on liquidity under normal and stress conditions.

Internal Controls

Appropriate controls, systems, and procedures are necessary to adhere to liquidity risk management policies.

Maturity Profiling

NBFCs should use a maturity ladder to manage net funding requirements, placing cash flows in different time buckets.

Liquidity Risk Measurement – Stock Approach

NBFCs should monitor critical ratios and set internal limits approved by their Board.

Currency Risk

NBFCs with foreign assets or liabilities should manage the liquidity risk arising from exchange rate volatility.

Managing Interest Rate Risk

NBFCs must manage the risk from changes in market interest rates, affecting their financial condition.

 Introduction to RBI – NBFC Scale Based Regulation

Regulations applicable for NBFC-BL

Regulations applicable for NBFC-ML

Regulatory Instructions for NBFC-UL

Directions for NBFC – Micro Finance MFIs

Specific Directions for NBFC-Factors and NBFC-ICCs

Specific Directions for Infrastructure Debt Funds IDFs-NBFC

Scoring Methodology for Identification of NBFC as NBFC-UL

Regulatory Guidance on Implementation of Ind AS by NBFCsv

Norms on Restructuring of Advances by NBFCs

Early Recognition of Financial Distress

Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries

Disclosures in Financial Statements – Notes to Accounts of NBFCs

Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs

Guidelines for Credit Default Swaps – NBFCs as Users

Guidelines on Private Placement of NCDs by NBFCs

Guidelines for Entry of NBFCs into Insurance

Guidelines on Issue of Co-Branded Credit Cards

Guidelines on Distribution of Mutual Fund Products by NBFCs

Guidelines on Perpetual Debt Instruments

Guidelines on Liquidity Coverage Ratio (LCR)

Balance Sheet Disclosure Guidelines for NBFCs in Middle Layer and Above

Self-Regulatory Organization (SRO) for NBFC-MFIs – Criteria for Recognition