Mumbai: The Reserve Bank of India plans to usher in new asset liability management (ALM) norms for non-banking finance companies (NBFCs) — similar to the one for banks — to avert asset liability mismatches like the one that led IL&FS to default and cause a liquidity squeeze.

“The recent experience of debt default of a systemically important NBFC highlighted the vulnerability and need for strengthening regulatory vigil, on the sector in general and on asset liability management (ALM) framework in particular,” the RBI said in its ‘Trend and Progress’ report released on Friday.

ALM guidelines are applicable to non-deposit-taking NBFCs with asset size of Rs 100 crore and above and to those deposit-taking companies which have a deposit base of Rs 20 crore and more. At present, ALM guidelines, as prescribed for the sector, are related to ALM information systems, ALM organisation including setting up of asset liability committee and its composition, and the ALM process. These also detail out the requirement for monitoring of structural liquidity, short-term dynamic liquidity and interest rate sensitivity. The banking regulator said these instructions are less granular compared with that of banks. Also, the ALM instructions for registered core investment companies are minimal. The RBI intends to strengthen the ALM framework for NBFCs on lines similar to that for banks and harmonise it across the different categories of NBFCs.

According to the central bank, a study suggests that NBFCs operate a passive strategy for managing asset-liability mismatches by covering gaps in the wholesale funding markets, rendering them vulnerable to liquidity risks.

In its report, the RBI said that its continuing vigil on the regulatory and supervisory front on NBFCs will ensure that the growth of the sector is sustained, and liquidity fears are allayed.

Recent concerns about asset-liability mismatches have been proactively addressed through liquidity provisions by the Reserve Bank, the regulator said. In October, the RBI had allowed NBFCs to co-originate priority sector loans with banks to generate synergy arising from the combination of low- cost funds from banks and lower cost of operations of NBFCs relative to the latter.

“While in 2018-19, though concerns surrounding the sector due to debt defaults amid temporary asset liability mismatches arose, the inherent strength of the sector, coupled with the Reserve Bank’s continuing vigil on the regulatory and supervisory front, will ensure that the growth of the sector is sustained, and liquidity fears are allayed,” RBI said in the report.

The consolidated balance sheet of NBFCs expanded in 2017-18 and in 2018-19 (up to September), buoyed by credit expansion of NBFC NDSI 13.4%, while the balance sheet of deposit-taking NBFCs registered robust growth at 24.4% in 2017-18 on account of a sharp rise in loans and advances. The RBI also noted that the financial performance of NBFCs, including profitability, asset quality and capital adequacy, improved during 2017-18 as they weathered the transient effects of demonetisation and implementation of GST.

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