NBFCs may follow banks in liquidity reporting; cost of capital set to go up

New framework to be akin to Reporting Friday norms; pressure on equity, and debt pricing set to rise

The Reserve Bank of India (RBI) is set to review the structural liquidity statements (SLS) filed by non-banking finance companies (NBFCs) with it to make them more rigorous.

They will form part of the iron-clad asset-liability management (ALM) norms for the sector, which are on the anvil, and bring NBFCs on a par with banks on dynamic reporting on liquidity.

The new framework may not cover the entire universe of NBFCs, which run into thousands, but will cover the entities that are systemically important and defined as those with an asset size of Rs 5 billion.

A cap on NBFCs’ reliance on commercial papers (CPs) is also in the works. This, in turn, may force them to bring in more by way of equity and diversify their resource mix even as this pushes up the cost of capital.

A top financial industry source said “while banks report to the RBI on a fortnightly basis (Reporting Friday) in an aggregated manner, the granular data is filed on a weekly basis”. 

Banks report the inflow-outflow position or the “gap” for their domestic and foreign currency, overseas operations and a consolidated one as part of the SLS across 10 time-buckets. The time-slots range from daily, 2-7 days, 8-14 days, 15-28 days, 29 days; quarterly statements up to a year; and in yearly slots of 1-3 years, 3-5 years, and over five years. These were put in place in November 2012. Until then, banks used to prepare a domestic SLS (rupee) on a daily basis and reported to the RBI on a fortnightly basis.

Tightening things

• NBFCs’ structural liquidity statements to be made rigorous
   
• To form part of the iron-clad asset-liability norms for the sector which is on the anvil
   
• NBFCs will effectively be on a par with banks when it comes to liquidity and ALM practices
   
• Cap on commercial papers in resource mix on cards
   
• NBFCs will have to bring in more by way of equity capital, tap into medium-term bond market
   
• Cost of capital set to go up

In the case of NBFCs, while they do have an SLS, it is not as rigorous as that of banks, given that not all of them are deposit-taking entities. The time-buckets are also different as even the deposit-taking players don’t raise current and savings accounts; and unlike banks, they are not participants in the call-money market or part of the settlement systems. But in the aftermath of the Infrastructure Leasing & Financial Services fiasco, which blindsided the entire system, it is felt tightening things is the need of the hour. 

NBFC norms were fine-tuned effective September 2008, when the periodicity of the statement of short-term dynamic liquidity was made monthly, and that for structural liquidity half-yearly.

It was to be submitted within 10 days of the close of the month to which it related; and the half-yearly statement within 20 days of the close of the half-year. Mint Road had also given time to NBFCs then and said “to finetune the system, the first return for the period ended September 2008 would be submitted by the first week of January 2009”. The periodicity of these returns was against reiterated in a master circular on July 1, 2015. “These time-frames may now be tightened,” added another industry source.

It was pointed out that the new framework will mirror the observation of RBI Deputy Governor Viral Acharya, who said in the first week of October this year “I would like to urge all financial firms to place greater reliance on equity and other modes of long-term finance for funding of long-term assets rather than relying excessively on short-term wholesale paper”. Deputy Governor N S Vishwanathan had noted “there are ALM guidelines, but we are looking at strengthening them so that we can avoid this rollover risk going forward”