{"id":3744,"date":"2021-03-31T06:39:22","date_gmt":"2021-03-31T06:39:22","guid":{"rendered":"https:\/\/swaritadvisors.com\/blog\/?p=3744"},"modified":"2021-03-31T07:20:19","modified_gmt":"2021-03-31T07:20:19","slug":"maintenance-of-liquidity-coverage-ratio-under-nbfc","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/blog\/maintenance-of-liquidity-coverage-ratio-under-nbfc\/","title":{"rendered":"A Complete Guide on Maintenance of Liquidity Coverage Ratio under NBFC"},"content":{"rendered":"\n<p class=\"has-drop-cap\">NBFC or\nNon-Banking Financial Company is one of the primary contributors to the economy\nof India. Over the previous years, this financial company has observed\noutstanding growth owing to its client-oriented business roles. Their\noperational protocol endures a weird resemblance to the regional banks. Their\nkey area of function is to provide money through short-term and long-term loans\nwith an affordable rate of interest. Earlier, the Reserve Bank of India has\ninstructed the requirements to maintain the liquidity coverage ratio under <strong><a href=\"https:\/\/swaritadvisors.com\/nbfc-registration\" class=\"text-primary\">NBFC<\/a><\/strong>. In this blog,\nwe are going to discuss the maintenance of high-quality liquid assets and\nLiquidity Coverage Ratio under NBFC.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a3a62785581e\" class=\"ez-toc-cssicon-toggle-label\"><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><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a3a62785581e\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/blog\/maintenance-of-liquidity-coverage-ratio-under-nbfc\/#An_Overview_of_Liquidity_Coverage_Ratio_under_NBFC\" title=\"An Overview of Liquidity Coverage Ratio under NBFC\">An Overview of Liquidity Coverage Ratio under NBFC<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/blog\/maintenance-of-liquidity-coverage-ratio-under-nbfc\/#Lets_Understand_the_High-Quality_Liquid_Assets\" title=\"Let\u2019s Understand the High-Quality Liquid Assets\">Let\u2019s Understand the High-Quality Liquid Assets<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/blog\/maintenance-of-liquidity-coverage-ratio-under-nbfc\/#Level_1_Asset\" title=\"Level 1 Asset\">Level 1 Asset<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/blog\/maintenance-of-liquidity-coverage-ratio-under-nbfc\/#Level_2A_Assets\" title=\"Level 2A Assets\">Level 2A Assets<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/blog\/maintenance-of-liquidity-coverage-ratio-under-nbfc\/#Level_2B_Assets\" title=\"Level 2B Assets\">Level 2B Assets<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/blog\/maintenance-of-liquidity-coverage-ratio-under-nbfc\/#Detailed_Note_on_Section_45IB_of_RBI_Act_1934\" title=\"Detailed Note on Section 45IB of RBI Act 1934\">Detailed Note on Section 45IB of RBI Act 1934<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/swaritadvisors.com\/blog\/maintenance-of-liquidity-coverage-ratio-under-nbfc\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"An_Overview_of_Liquidity_Coverage_Ratio_under_NBFC\"><\/span>An Overview of Liquidity Coverage Ratio under NBFC<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>This\nratio states the proportion of the <strong>High-Quality\nLiquidity Assets<\/strong> that a Non-Banking Financial Company has to manage and\ncontrol to fulfil the net cash outflows over the time period of thirty days or\none month in the state of the financial crisis of a market. The Non-Banking\nFinancial Companies function by obtaining credit from traditional lenders such\nas mutual funds, banks and offering credit to borrowers in the marketplace. This\nmodel of NBFC functions flawlessly in a strong economy. But, the problem may\nexperience in the gaze of the financial crisis. At the time of such phase, the\nability of a borrower to repay the loans may also be negotiated, which in turn\ngenerates the shortage of funds or money and Liquidity Coverage Ratio under\nNBFC. <\/p>\n\n\n\n<p>The mathematical\nexpression for <strong>LCR (Liquidity Coverage\nRatio under NBFC)<\/strong> is as follow:<\/p>\n\n\n\n<p><strong>Mathematically, it is given by:<\/strong><\/p>\n\n\n\n<p>The\nstock of High-Quality Asset divided (\/) by Total Net Cash flows over the next\nthirty days.<\/p>\n\n\n\n<p>It is\nessential to main 100% of Liquid Coverage Ratio for <strong><em>SIFI (Important Financial\nInstitutions). <\/em><\/strong>According to the aforementioned definition, we can\naccept that the LCR or Liquid Coverage Ratio is comprised of 2 authoritativecomponents\nas given below:<\/p>\n\n\n\n<ul><li><strong><em>High-Quality Liquid Assets<\/em><\/strong>: It denotes the assets which are imaginative and can be transformed into cash effortlessly and instantly at little or no loss to cover the net cash outflows at the time of liquidity stress time of thirty days.<\/li><li><strong><em>Total Net Cash Outflows<\/em><\/strong>: It states that the difference between total estimated cash outflows and total estimated cash inflows during a liquidity stress period of thirty days.<\/li><\/ul>\n\n\n\n<p><strong>Also, Read: <\/strong><mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/blog\/operational-manual-of-the-nbfcs\/\">Operational Manual of the NBFCs: A Complete Guide<\/a><\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Lets_Understand_the_High-Quality_Liquid_Assets\"><\/span>Let\u2019s Understand the High-Quality Liquid Assets<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>According\nto the <strong><em>Base III Framework<\/em><\/strong> associated with Liquidity Standard, High-Quality\nAssets are categorized in the following way:<\/p>\n\n\n\n<p>Level 1\nasset may be in any amount in the Total Stock of High-Quality Liquid Assets.\nBut, Level 2 asset is limited to a maximum of 40% of the total stock\nnecessities after taking into thought the applicable haircuts. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Level_1_Asset\"><\/span>Level 1 Asset<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Given\nLiquidity necessities, these assets may be taken at their market value without\napplying any reduction in market value, taking into thought related risk factor,\nor we also called this a haircut.<\/p>\n\n\n\n<ul><li>Cash and Cash Reverse in addition to essential\nCash Reverse Ratio;<\/li><li>Government Securities in excess of the least requirement\nof Statutory Liquidity Ratio;<\/li><li>Within the obligatory SLR requirement,\nGovernment Securities certified by RBI (The Reserve Bank of India) under <strong><em>MSF\nor Marginal Standing Facility<\/em><\/strong>;<\/li><li>Marketable securities by foreign nations\nfulfilling all the following situations:<\/li><\/ul>\n\n\n\n<ol><li>Assigned a zero per cent risk weight under the\nBasel II regular approach for credit risk;<\/li><li>Not granted by Non-Banking Financial Company or\na Bank or any of its affiliated companies;<\/li><li>Traded in huge and vigorous cash markets and has\nbeen proven to be a dependable source of liquidity in the markets even during tense\nsituations in the market.<\/li><\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Level_2A_Assets\"><\/span>Level 2A Assets<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>A\nminimum haircut of 15% must be applied to these assets.<\/p>\n\n\n\n<ul><li>Marketable securities representing claims\nguaranteed by:<\/li><\/ul>\n\n\n\n<ol><li>Sovereign;<\/li><li>Public Sector Company;<\/li><li>Multilateral Development Banks.<\/li><\/ol>\n\n\n\n<p>Those\nare given a 20% of risk hindrance under the Basel II Standardized scheme for\nCredit Risk and provided that they are not granted by a traditional bank or\nNon-Banking Financial Company (NBFC) or any its related companies.<\/p>\n\n\n\n<ul><li>The cooperate pledge is not allotted by a\ntraditional bank or Non-Banking Financial Company (NBFC) or any of its related\ncompanies, with a rating of AA4 or above, rated by an <strong><em>Eligible Credit Rating Agency\n(ECRA). <\/em><\/strong><\/li><li>Commercial Papers are not allotted by a\nbank\/NBFC\/PD or any associated companies, which safeguard short-term rating\nequivalent to the rating of AA4 or above by any authorized agency.<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Level_2B_Assets\"><\/span>Level 2B Assets<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Minimum\nhaircut of 50% in the market value shouldbe applied to these assets. These\nassets should be a maximum of 15% of the aggregate stock of High-Quality Liquid\nAssets.<\/p>\n\n\n\n<ul><li>Marketable securities representing claims on or\npledged claims sovereigns having credit rating not lower than BBB.<\/li><li>Common Equity Shares that fulfil the given\ncircumstances:<\/li><\/ul>\n\n\n\n<ol><li>Not allotted by a bank\/NBFC\/PD or any associated\ncompanies;<\/li><li>Comprised in the index of S&amp;P BSE Sensex and\nNSE CNX Nifty index.<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Detailed_Note_on_Section_45IB_of_RBI_Act_1934\"><\/span>Detailed Note on Section 45IB of RBI Act 1934<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>This\nsection of the RBI Act, 1934, encompasses the provisions for the maintenance of\nliquidity coverage ratio under NBFC. It has been in presence before the arrival\nof the liquidity coverage ratiounder NBFC by RBI or the Reserve Bank of India.<\/p>\n\n\n\n<p>As per\nthe Act, the deposit-taking Non-Banking Financial Company has to maintain a\nminimum level of an asset in the liquid form up to 15% of public deposit owing\nas on the final day of working of the 2<sup>nd<\/sup> past quarter.<\/p>\n\n\n\n<p>Non-Banking\nFinancial Companies are needed to invest the Threshold of 15% in the following\nway:<\/p>\n\n\n\n<ul><li>Minimum of 10% is permitted securities;<\/li><li>5% can be in other forms of deposit, mainly\ntagged as imaginative with any organized 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>The\nReserve Bank of India has made the rules and regulation for liquidity severer\nto maintain the possible liquidity stress situation in an attempt to keep up\nwith the changing economic condition and its potential results. As we saw\nabove, the Reserve Bank of India has started by creating liquidity necessities\nobligatory for the deposit-taking Non-Banking Financial Companies by\nintegrating Section 45 IB in the <a href=\"https:\/\/www.rbi.org.in\/\">RBI<\/a> Act.\n<\/p>\n\n\n\n<p>Further, in the new necessities of liquidity coverage ratio under NBFC, the Reserve Bank of India suggested maintaining High-Quality Liquid Assets, a stepped-up variety of the Liquid Assets that were conserved under Section 45 IB of the RBI Act. Always remember that in the forthcoming phases of the economy, the Reserve Bank of India may make its rules or standards stricter. In true letter and essence, severe compliances by the Non-Banking Financial Companies of the Liquidity Coverage Ratio under NBFC is crucial for saving from potential economic poverty in rough times.<\/p>\n\n\n\n<p><strong>Also, Read: <\/strong><mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/blog\/terrorist-financing-and-money-laundering-for-nbfcs\/\">A Complete Guide on Terrorist Financing and Money Laundering for NBFCs<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>NBFC or Non-Banking Financial Company is one of the primary contributors to the economy of India. Over the previous years, this financial company has observed outstanding growth owing to its client-oriented business roles. Their operational protocol endures a weird resemblance to the regional banks. Their key area of function is to provide money through short-term [&hellip;]<\/p>\n","protected":false},"author":6,"featured_media":3745,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[58,56],"tags":[553],"acf":[],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/3744"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/comments?post=3744"}],"version-history":[{"count":4,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/3744\/revisions"}],"predecessor-version":[{"id":3755,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/3744\/revisions\/3755"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media\/3745"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media?parent=3744"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/categories?post=3744"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/tags?post=3744"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}