Mutual Funds Commodities Research Tax Planning IPO Our Team Contact Us    
Google
Web www.equitybulls.com
Interesting Articles

| More

Proposed Liquidity Framework for NBFCs Shifts Focus to Tangible Liquid Buffers - India Ratings and Research

Posted On: 2019-06-13 16:52:17

India Ratings and Research (Ind-Ra) believes the proposed draft guidelines on creating a liquidity framework for non-banking financial companies (NBFCs) will enforce on-balance sheet liquidity maintenance through the cycle and be conducive for developing holistic liquidity management contour. The agency believes the guidelines will also disincentive NBFCs from relying heavily on short-term financing options. However, the proposed framework is unlikely to have any meaningful impact on addressing the current environment of high risk aversion.

Considering the existence of structural issues such as twin deficit, depleting household savings, limited avenues for alternative sources of financing and feeble capital market at the macro and micro levels, there could be higher occurrences of liquidity volatility in the medium term. However, the financially better placed non-banks (NBFCs and housing finance companies (HFCs)) with strong sponsor support and well-established positioning in the ecosystem may be able to withstand it better than others.

As per the proposed guidelines, NBFCs with an asset size of INR50 billion or above and all deposit taking NBFCs irrespective of asset size will have to maintain a liquidity buffer in terms of a liquidity coverage ratio (LCR) and maintain investment in high quality liquid asset (HQLA). The proposed framework allows NBFCs to maintain 60% of the required investment in HQLA starting 1 April 2020, and the required floor to go up by 10% in the subsequent years before it reaches 100% in April 2024. The agency believes, in the last six-to-eight months, non-banks generally have been cautious on their liquidity strategy with many raising a considerable amount of on-balance sheet liquidity. If this liquidity were to sustain, Ind-Ra believes, maintaining 60% by April 2020 should be largely achievable.

Also, as per the guidelines, bucketing the asset liability management (ALM) in one month tenor in the form of buckets (0-7 days, 7-14 days and 14 days-1 month) incrementally is unlikely to have any material impact on NBFCs and HFCs, as the gaps allowed would not contain risk during stressed times.

Impact on NBFCs: The proposed LCR framework by the Reserve Bank of India, once fully implemented, is likely to have an asymmetric impact on NBFCs, depending on the nature of their business (i.e; wholesale or retail) and their credit profiles (opportunity cost). The framework requires large NBFCs to carry on-balance sheet liquidity in the form of cash and bank balance or investments eligible under HQLA. As per Ind-Ra's assessment, large NBFCs in the asset financing space would find it less demanding to comply to the LCR norms with only a marginal impact on their profitability. However, NBFCs which have been witnessing sizeable asset liability mismatches or those largely operating in the wholesale or the semi-wholesale space on the asset side, may find the framework having a meaningful impact on their profitability. Additionally, few NBFCs that have been operating on a slightly aggressive liquidity strategy factoring in the liquidity support from their sponsors may need to realign their strategies.

Ind-Ra notes that financially stronger NBFCs would not run mismatches in the short-term buckets (up to one month) and hence the quantum of minimum HQLA needed to be maintained would be 25% stressed outflow in one month bucket. According to the assessment based on ALM at FYE19, the top 11 NBFCs rated by Ind-Ra would have required around INR66 billion and INR111 billion to maintain 60% and 100% LCR, respectively. The top nine HFC players would have required INR170 billion and INR283 billion to maintain 60% and 100% LCR, respectively, at FYE18. As suggested in the circular, the diversification of funding across instruments / counterparty / currency will lead NBFCs to maintain a balance funding approach across interest rate cycle, thereby increasing the funding cost for the entire system.

Adverse Impact on Mutual Fund Inflows: Ind-Ra believes the proposed LCR framework will reduce NBFCs' investment parked in mutual funds. In general, NBFCs maintain some cash & cash equivalent buffer for operational purposes. However, in the last few quarters, many NBFCs have increased their liquidity buffer by maintaining a considerable amount of liquid assets depending on the ability to mobilise funds. Ind-Ra believes more often than not, the amount parked in a liquid mutual fund or other related money market assets is to reduce opportunity cost. As per the proposed circular, investments in liquid mutual fund, bank fixed deposit or certificate of deposit are excluded from the list of HQLA, largely to contain industry-specific counter-party risk.

Corporate CP to Benefit: As opposed to the commercial papers (CPs) issued by NBFCs, CPs issued by corporates (by issuers rated AA- and above) are included in the HQLA basket with an applicable haircut of 15%. The agency believes NBFC will be more inclined to invest in corporate CPs given their limited duration and higher yield, which could reduce the opportunity cost of maintaining LCR. In that case, the spread between corporate CPs and the CPs issued by NBFCs will widen. Moreover, the incremental demand from NBFCs for money market instrument will be constructive for the money market yield curve.


Source: Equity Bulls

Click here to send ur comments or to feedback@equitybulls.com





Other Headlines:

NSE is now world's largest derivatives exchange

Person of the year 2019

Motilal Oswal AMC dumps 812,573 shares of Dishman Carbogen in BSE

Kamla Vachani dumps 75000 shares of Dixon Technologies India Ltd

Abhiram Seth has bought 76,050 shares of Ion Exchange India Ltd

Subhkam Properties LLP acquires 498,105 shares of Tips Industries Ltd

Selling continues in Sathavahana Ispat Ltd

Bulk deal reported in Manaksia Steels Ltd

HDFC Small Cap Fund dumps shares of GFL Limited

Heshika Growth Fund has sold 4,70,013 shares of Sathavahana Ispat Ltd

AXIS Trustee Services Ltd dumps 28,80,347 shares of Reliance Home Finance Ltd

Birla Mutual Fund acquires 7 lakh shares of Apollo Hospitals Ltd

352098 shares of CEAT Ltd change hands in bulk deal at NSE

Serum Institute of India Pvt Ltd dumps 851867 shares of Escorts

Integrated Core Strategies Asia Ptd Ltd dumps 18,30,093 shares of Glenmark Pharma

KBC Equity Fund, AXIS Trustee Services Ltd dumps shares of Reliance Infrastructure Ltd

Government Pension Fund Global acquires 31,15,676 shares of Indiabulls Housing Finance Ltd

Jwalamukhi Investment Holdings dumps shares of Hatsun Agro Product Ltd

Bulk deal reported in Future Supply Chain Solutions Ltd at BSE

HDFC Mutual Fund dumps shares of Everest Industries Ltd

CA Emerald Investments has sold 3 crore shares of SBI Life Insurance Co Ltd

Valeo Global Fund dumps 634,022 shares of Cerebra Integrated Technologies Ltd

Karma Captial Advisors Pvt Ltd acquires 3 lakh shares of Digicontent Limited

Bulk Deal reported in Lemon Tree Hotels Ltd

Bulk deal in Indiabulls Housing Finance Ltd

DSP AIF PHARMA FUND dumps 1,276,434 shares of Indoco Remedies Ltd

Milestone Trusteeship Services Private Limited dumps 10 crore shares of YES Bank

Kavi Global Opportunity Master Fund LP dumps 1.1 lakh shares of Nath Bio-Genes

Bulk Deal reported in Man Industries India Ltd

BNP Paribas Arbitrage acquires 1 mn shares of Gayatri Projects Ltd

PNB dumps 40,00,183 shares of MVL Ltd

Smallcap World Fund Inc acquires 13,82,889 shares of IIFL Wealth Management Ltd

Director of Seamec Ltd purchases 15,877 shares from market

Kitex Childrenswear Ltd raises stake in KITEX Garments Ltd

Brij Investments Pvt Ltd increases stake in Usha Martin Ltd to 1.75%

Insider buying reported in Alembic Ltd

Promoter group entity acquires 50,460 shares of Godrej Industries Ltd

Inox Leasing and Finance Ltd ups stake in GFL Ltd to 52.69%

Ekta Kabra acquires 14,50,000 shares of Kabra Extrusion Technik Ltd through bulk deal

Varun Kumar Kabra purchases 844,493 shares of Plastiblends India Limited

NIITians Welfare Trust dumps 1,489,935 shares of NIIT Ltd in NSE, 1,518,028 shares in BSE

Bulk deal reported in CEAT Ltd

Vanguard Energy Fund sells 15,00,000 shares of Cox & Kings Limited

RSWM Ltd dumps 315,000 shares of HEG Ltd

Jupiter India Fund dumps 958,771 equity shares of Cox & Kings Financial Service Ltd

Mofatraj Munot and Parag Munot have sold 69 lakh shares of Kalpataru Power Transmission Ltd

Block deal reported in Lakshmi Vilas Bank Ltd

Bulk deal in NACL Industries Ltd

Bulk Deals in Karur Vysya Bank Ltd

Azimuth Investments Limited increases stake in Filatex India Ltd to 7.20%







Website Created & Maintained by : Chennai Scripts
West Mambalam, Chennai - 600 033,
Tamil Nadu, India

disclaimer copyright © 2005 - 2019