Page 26 - coffee table book-Nov 2020 - web_Neat

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IL&FS CRISIS:

A CLOSE Over a year down the line, and there has been no end in granting the RBI power over NBFC boards (Union budget
sight. The ailing NBFC sector has been on the receiving end FY20); new norms to improve the liquidity situation, and so
EXAMINATION of a slew of government/RBI containment and austerity on.
measures. Noteworthy among these include tighter RBI
scrutiny; one-time six months' partial credit guarantee on Come 2020, the extension of a gradually scalable LCR and
purchase of pooled assets from NBFCs; priority sector NSFR from banks to NBFCs will also be a strong step by the
lending status to key NBFC segments; increase in FALLCR RBI in this direction.
(facility to avail liquidity for liquidity coverage ratio) by 0.5%
Liquidity powered by an advanced technology suite
for banks and other initiatives to ease credit flow to NBFCs.
Feb 12 2020 The liquidity risk management framework of a bank or an
Regulations such as the introduction of mandatory levels of NBFC is a decisive factor in how effectively the liquidity
revision in maturity buckets, liquidity monitoring tools, stock position of a financial institution is measured and maintained.
Jaya Vaidhyanathan
approach to LRM (liquidity risk management), and Liquidity The best outcomes are when stakeholders from different
CEO, BCT Digital
Coverage Ratio (LCR) to large NBFCs are also likely to see levels of the NBFC (organisational-level, business-level and
results. user-level) are involved in the process as independent, yet
accountable members. As the final frontier, external
But the question remains — are these measures enough or regulators, auditors, and credit rating agencies, need to play
did they come through a bit too late? proactive roles in identifying risk factors, flagging and
following through to closure.
Maintaining liquidity and asset quality through
good governance Across the NBFC sector, asset-liability management (ALM) is
The sheer nature of the business of IL&FS demanded at the nascent stage, and needs to be structured in a
effective management of assets and liquidity in the short- manner at par with scheduled commercial banks. The RBI’s
and long-terms. Interestingly, in the case of IL&FS, even latest guidelines, involving the ALCO, and its rules enforcing
though there were startling discrepancies in the balance new monitoring mechanisms, have fuelled an urgency
sheet, auditors and rating agencies noted them and moved among NBFCs to adopt technology for liquidity risk
on – or arguably, did not take notice at all. management.
In this context, the role of a robust monitoring mechanism In today’s volatile marketplace, the interest rate risk by itself
becomesmost important for safeguarding the health of the must be closely linked to funds transfer pricing, intraday
system. In retrospect, in the IL&FS scenario, adhering to a liquidity and overall capital management. There is a need for
four-tier governance framework – involving both internal a holistic approach using a robust ALM framework to
The IL&FS debacle of 2018 opened India to the imminent risks and external lines of defence – could have perhaps protect earnings and capital while reducing complexity and
around asset-liability mismatch and inadequate liquidity accelerated intervention and remediation by authorities. ensuring compliance.
management. Banks were quick to react to the ripple effect, by More power to RBI through the ratication of new A standardized system with an independent and targeted
withholding credit from NBFCs, even as mutual funds halted all regulations governance framework (adhering to RBI regulations and
renancing activities. In no time at all, India’s shadow banking Perhaps the silver lining - a direct consequence of the NBFC supported by specialist firms) can make an ocean of
system was knee-deep in trouble. Ratings of several prominent liquidity crisis - was the much-needed shakedown of the difference in the financial health of an NBFC. Such a
players were downgraded. The possibility of a consumption shadow banking system jointly by RBI and SEBI. Steps specialist application can help banks and NBFCs meet their
slowdown was suddenly very real. towards remediation included: grouping HFCs under the immediate liquidity requirements. Beyond this, it can also
RBI ambit (pulling them away the National Housing Bank); leapfrog them to the next level of compliance.
stripping several non-compliant NBFCs off their licenses;

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