{"id":24761,"date":"2021-01-23T12:43:05","date_gmt":"2021-01-23T07:13:05","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=24761"},"modified":"2021-01-23T12:43:07","modified_gmt":"2021-01-23T07:13:07","slug":"liquidity-coverage-ratio-high-quality-liquid-assets-underlining-nbfc-in-india","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/liquidity-coverage-ratio-high-quality-liquid-assets-underlining-nbfc-in-india\/","title":{"rendered":"Maintenance of Liquidity Coverage Ratio &#038; High-Quality Liquid Assets Underlining NBFC in India"},"content":{"rendered":"\n<p class=\"has-drop-cap\">NBFC is one of the key contributors to the Indian Economy. Over\nthe past few years, this sector has witnessed tremendous growth owing to its customer-oriented\nbusiness functions. Their working protocol bears a weird resemblance to traditional banks.<\/p>\n\n\n\n<p>Their primary area of function is to lend money via short or\nlong-term loans with flexible interest rate. In the past, RBI has mandated the\nrequirement for maintaining the Liquidity Coverage ratio for these institutes.\nIn the article, we will try to unfold various facets regarding the same.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/liquidity-coverage-ratio-high-quality-liquid-assets-underlining-nbfc-in-india\/#What_Is_The_Liquidity_Coverage_Ratio\" >What Is The Liquidity Coverage Ratio?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/liquidity-coverage-ratio-high-quality-liquid-assets-underlining-nbfc-in-india\/#An_Overview_on_the_High-Quality_Liquid_Assets\" >An Overview on the High-Quality Liquid Assets<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/liquidity-coverage-ratio-high-quality-liquid-assets-underlining-nbfc-in-india\/#What_is_the_Concept_behind_the_Working_of_NBFCs_and_what_Triggers_the_Liquidity_Crisis\" >What is the Concept behind the Working of NBFCs, and what Triggers the\nLiquidity Crisis?&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/liquidity-coverage-ratio-high-quality-liquid-assets-underlining-nbfc-in-india\/#RBI-Based_Liquidity_Coverage_Requirement_Applicable_to_NBFCs\" >RBI-Based Liquidity Coverage Requirement Applicable to NBFCs<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/liquidity-coverage-ratio-high-quality-liquid-assets-underlining-nbfc-in-india\/#A_Brief_Note_on_Section_45_IB_of_the_RBI_Act_1934\" >A Brief Note on Section\n45 IB of the RBI Act, 1934<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/corpbiz.io\/learning\/liquidity-coverage-ratio-high-quality-liquid-assets-underlining-nbfc-in-india\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_Is_The_Liquidity_Coverage_Ratio\"><\/span>What Is The Liquidity Coverage Ratio?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Liquidity Coverage Ratio <\/strong>denotesthe proportion of the High-Quality Liquidity Assets that an <a href=\"https:\/\/corpbiz.io\/nbfc-registration\"><strong>NBFC<\/strong><\/a> has to manage to meet the net cash outflows over the time span of 30 days, in the state of the market\u2019s fiscal crisis. The mathematical expression for Liquid Coverage Ratio is as follows:-<\/p>\n\n\n\n<p><strong>Numerically,\nIt Is Given By<\/strong><strong><\/strong><\/p>\n\n\n\n<p style=\"text-align:left\">Stock of High Quality Liquid Asset<\/p>\n\n\n\n<p style=\"text-align:left\">Total Net Cashflows over the Next 30 Days<\/p>\n\n\n\n<p>Important\nFinancial Institutions are needed to maintain the 100% of Liquid Coverage\nRatio. As per the aforesaid definition, we can assume that the Liquidity\nCoverage Ratio is comprised of two imperative components given below:-<\/p>\n\n\n\n<ol><li>High-Quality&nbsp;Liquid Assets<\/li><li>Total\nNet Cash Outflows<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"An_Overview_on_the_High-Quality_Liquid_Assets\"><\/span>An Overview on the High-Quality Liquid Assets <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As per the Basel III Framework related to Liquidity Standard, High quality liquid assets are classified in the following way:&nbsp;<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter is-resized\"><img decoding=\"async\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/An-Overview-on-the-High-Quality-Liquid-Assets.png\" alt=\"High-Quality Liquid Assets \" class=\"wp-image-24794\" width=\"486\" height=\"429\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/An-Overview-on-the-High-Quality-Liquid-Assets.png 985w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/An-Overview-on-the-High-Quality-Liquid-Assets-300x265.png 300w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/An-Overview-on-the-High-Quality-Liquid-Assets-768x678.png 768w\" sizes=\"(max-width: 486px) 100vw, 486px\" \/><\/figure><\/div>\n\n\n\n<p>Level 1 asset might be in a variable proposition in the total\nstock of High-Quality Liquid Assets. But, Level 2 is to be confined to 40% of\nthe overall stock requisites after taking applicable haircuts into account.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Level 1\nAsset<\/strong><\/h3>\n\n\n\n<p>Given Liquidity requisites, these assets might be taken at their\nmarket value without considering the haircuts. (the term \u201cHaircut, in view of\nlegal affair, is regarded as the reduction applied to the asset\u2019s value to\ncalculate margin, capital requirements, or collateral level).&nbsp;<\/p>\n\n\n\n<ul><li><strong>Cash and cash reserves<\/strong>&nbsp;in surplus of necessitated Cash Reserve Ratio<\/li><li><strong>Government securities<\/strong>&nbsp;in surplus of the minimum Statutory Liquidity Ratio requisite.<\/li><li>Within the compulsory SLR requisite,&nbsp;<strong>Government securities<\/strong>&nbsp;permitted by the Reserve Bank of India under Marginal Standing Facility (MSF)<\/li><li><strong>Marketable securities by overseas sovereigns<\/strong>&nbsp;fulfilling the given      conditions:<\/li><\/ul>\n\n\n\n<ol><li>Allocated a<strong>&nbsp;0% risk weight<\/strong>&nbsp;under the Basel II standardized regime for credit risk;<\/li><li>Not granted by a bank\/NBFC\/financial institution\/ or any of its connected entities.<\/li><li>Traded in large &amp; active repo or cash markets; and has been recognized to be a dependable source of liquidity in markets even during bad market conditions.<\/li><\/ol>\n\n\n\n<h3 class=\"wp-block-heading\">Level 2A Assets<\/h3>\n\n\n\n<p>A minimum haircut of&nbsp;<strong>15%<\/strong>&nbsp;should be applied to these assets.<\/p>\n\n\n\n<ul><li>Marketable securities&nbsp;indicating claims guaranteed by<\/li><\/ul>\n\n\n\n<ol><li>Sovereigns<\/li><li>Multilateral development banks<\/li><li>Public Sector Entity<\/li><\/ol>\n\n\n\n<p>Those are given a&nbsp;<strong>20% risk encumbrance<\/strong>&nbsp;under the Basel II Standardized regime for credit risk &amp;&nbsp;provided&nbsp;that they are not issued by a bank\/NBFC\/financial institution or any of its connected entities.<\/p>\n\n\n\n<ul><li><strong>The Corporate bonds<\/strong> are not issued by a bank\/ NBFC\/ financial institution or any of its connected entities, with a&nbsp;<strong>rating of AA4\/above&nbsp;<\/strong>by an (ECRA) Eligible Credit Rating Agency.<\/li><li><strong>Commercial Papers&nbsp;<\/strong>not issued by a PD\/bank\/financial institution\/affiliated entities, which secured short-term rating equivalent to the rating of AA4 or above by certified agency.<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Level 2B\nAssets<\/strong><\/h3>\n\n\n\n<p>&nbsp;A minimum haircut of fifty percent in the market value\nought to be applied to these assets. Level 2B assets ought to be a maximum of 15%\nof the aggregate stock of High-Quality liquid assets.<\/p>\n\n\n\n<ul><li><strong>Marketable securities<\/strong>&nbsp;embodying claims on or claims promised by sovereigns having credit rating&nbsp;<strong>not lower than BBB.<\/strong><\/li><li><strong>Common Equity Shares<\/strong>&nbsp;that meet the given conditions:<\/li><\/ul>\n\n\n\n<ol><li>Not issued by a financial institution\/bank\/NBFC or any of its affiliated entities;<\/li><li>Included in S&amp;P BSE Sensex index and or NSE CNX Nifty index<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_Concept_behind_the_Working_of_NBFCs_and_what_Triggers_the_Liquidity_Crisis\"><\/span>What is the Concept behind the Working of NBFCs, and what Triggers the\nLiquidity Crisis?&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The NBFCs usually operate by procuring credit from traditional lenders like banks and Mutual funds and providing credit to borrowers in the market.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" width=\"985\" height=\"358\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/What-is-the-Concept-behind-the-Working-of-NBFCs-and-what-Triggers-the-Liquidity-Crisis.png\" alt=\"Working of NBFCs\" class=\"wp-image-24814\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/What-is-the-Concept-behind-the-Working-of-NBFCs-and-what-Triggers-the-Liquidity-Crisis.png 985w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/What-is-the-Concept-behind-the-Working-of-NBFCs-and-what-Triggers-the-Liquidity-Crisis-300x109.png 300w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/What-is-the-Concept-behind-the-Working-of-NBFCs-and-what-Triggers-the-Liquidity-Crisis-768x279.png 768w\" sizes=\"(max-width: 985px) 100vw, 985px\" \/><\/figure><\/div>\n\n\n\n<p>This NBFC model works seamlessly in the healthy economy.\nHowever, the problem might incur in the stare of economic crisis. During such a\nphase, the borrower\u2019s ability to repay the loans may also compromised, which in\nturn creates the scarcity of funds and Liquidity Coverage Ratio for the NBFCs.<\/p>\n\n\n\n<p><em><strong>This may be explained as-<\/strong><\/em><\/p>\n\n\n\n<ul><li>NBFCs are encountering liquidity crisis; which ultimately hampering their lending ability. <\/li><li>This slows down the credit flow as NBFC lending ability is undermined. <\/li><li>Disrupt the economic conditions of the companies by mitigating the viable sources of funding<\/li><li>Owing to reduce profitability, companies are finding it hard to repay the loans.&nbsp; <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"RBI-Based_Liquidity_Coverage_Requirement_Applicable_to_NBFCs\"><\/span>RBI-Based Liquidity Coverage Requirement Applicable to NBFCs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In order to comprehend the scope of applicability of Liquidity Coverage Ratio, we have to categorize the NBFCs into 2 sections mentioned below: <\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" width=\"985\" height=\"601\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/RBI-Based-Liquidity-Coverage-Requirement-Applicable-to-NBFCs.png\" alt=\"RBI-Based Liquidity Coverage \" class=\"wp-image-24816\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/RBI-Based-Liquidity-Coverage-Requirement-Applicable-to-NBFCs.png 985w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/RBI-Based-Liquidity-Coverage-Requirement-Applicable-to-NBFCs-300x183.png 300w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/RBI-Based-Liquidity-Coverage-Requirement-Applicable-to-NBFCs-768x469.png 768w\" sizes=\"(max-width: 985px) 100vw, 985px\" \/><\/figure><\/div>\n\n\n\n<p><strong>It is included in the given table:<\/strong><\/p>\n\n\n\n<table class=\"table table-bordered\"><tbody><tr><td>\n  <strong>DATES<\/strong><strong><\/strong>\n  <\/td><td>\n  <strong>CATEGORY 1 AND CATEGORY 2.2<\/strong><strong><\/strong>\n  <\/td><td>\n  <strong>CATEGORY 2.1<\/strong><strong><\/strong>\n  <\/td><\/tr><tr><td>\n  <strong>Dec\n  1, 2020<\/strong>\n  <\/td><td>\n  50%\n  <\/td><td>\n  30%\n  <\/td><\/tr><tr><td>\n  <strong>Dec\n  1, 2021<\/strong>\n  <\/td><td>\n  60%\n  <\/td><td>\n  50%\n  <\/td><\/tr><tr><td>\n  <strong>Dec\n  1, 2022<\/strong>\n  <\/td><td>\n  70%\n  <\/td><td>\n  60%\n  <\/td><\/tr><tr><td>\n  <strong>Dec\n  1, 2023<\/strong>\n  <\/td><td>\n  85%\n  <\/td><td>\n  85%\n  <\/td><\/tr><tr><td>\n  <strong>Dec\n  1, 2024<\/strong>\n  <\/td><td>\n  100%\n  <\/td><td>\n  100%\n  <\/td><\/tr><\/tbody><\/table>\n\n\n\n<p>The following list comprises of NBFCs not\nincluding the requirement of maintaining the High-Quality Liquid Asset, which\nare given below:-<\/p>\n\n\n\n<ul><li>Core Investment Companies<\/li><li>Type 1 NBFC-NDs<\/li><li>Non-Operating Financial Holding Companies<\/li><li>Standalone Primary Dealers<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"A_Brief_Note_on_Section_45_IB_of_the_RBI_Act_1934\"><\/span>A Brief Note on Section\n45 IB of the RBI Act, 1934<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The <strong>Section 45 IB of RBI ACT, 1934<\/strong><sup><a href=\"https:\/\/www.rbi.org.in\/Scripts\/BS_NBFCNotificationView.aspx?Id=1281\"><strong>[1]<\/strong><\/a><\/sup> encloses the provisions for the maintenance of liquid assets NBFCs. It has been in existence before the arrival of the Liquidity Coverage Ratio by the Reserve Bank of India.&nbsp;<\/p>\n\n\n\n<p>According\nto the said Act, the deposit-taking NBFC has to maintain a minimum level of an\nasset in the liquid form up to 15% of public deposit outstanding as on the\nfinal working day of the second previous quarter.&nbsp;<\/p>\n\n\n\n<p><strong>NBFCs are required to Invest the Threshold of 15% in the\nfollowing way:-&nbsp;<\/strong><\/p>\n\n\n\n<ul><li>Minimum&nbsp;<strong>10%<\/strong>&nbsp;in approved securities<\/li><li>The 5% can be in other forms of deposit, particularly tagged as unencumbered with any scheduled commercial bank.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There\nis no denying that RBI has tightened the existing norms for liquidity to\ncounter the potential liquidity stress to stay in line with the ever-evolving\neconomic situation &amp; its outcomes.<\/p>\n\n\n\n<p>It\u2019s a\nwell-known fact that the Reserve Bank of India mandates liquidity requirements\nfor deposit-taking NBFCS through the incorporation of Section 45 IB in the RBI\nAct. By incorporating Liquidity Coverage Ratio, the Reserve Bank wishes to\ninculcate the broad category of NBFCs to manage a stock of liquid assets.<\/p>\n\n\n\n<p>Furthermore, in the new Liquidity Coverage Requirements, the Reserve Bank of India has prescribed high-quality liquid Assets as per the Section 45 IB of the Act. The former renders more liquidity as compared to the latter one. Taking the above patterns into account, the Reserve Bank of India may tighten the existing norms in upcoming times. Strict compliance by the private lenders of the Liquidity Coverage Ratio is vital to ensure protection against possible economic degradation.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/government-issues-directions-for-interest-waiver-on-loan-to-borrowers\/\">\nGovernment Issues Directions for Interest Waiver on Loan to Borrowers\n<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>NBFC is one of the key contributors to the Indian Economy. Over the past few years, this sector has witnessed tremendous growth owing to its customer-oriented business functions. Their working protocol bears a weird resemblance to traditional banks. Their primary area of function is to lend money via short or long-term loans with flexible interest [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":24773,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[91],"tags":[1462],"acf":{"service_id":"8"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.","postViews":5259,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/24761"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=24761"}],"version-history":[{"count":27,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/24761\/revisions"}],"predecessor-version":[{"id":24817,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/24761\/revisions\/24817"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/24773"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=24761"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=24761"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=24761"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}