NBFCs will have to maintain liquid reserves

In order to ensure that non-banking finance companies (NBFCs) have a buffer for any unexpected requirements, they will now have to maintain liquid reserves.

The new norms are a fallout of the crisis in the sector following defaults by large firms like IL&FS Financial Services. The liquidity regulations announced by the RBI, will apply to most NBFCs like the ones lending to real estate developers and retail consumers for housing, vehicle and microfinance loans. The only NBFCs exempt from this will be pure-play investment companies and government bond dealers.

The liquid reserves have to be in high-quality assets like government bonds, debt securities or actual cash that is adequate to fund 30 days of operations. The presence of liquid reserves will prevent an NBFC from going into a default spiral if some inflows get delayed. There have been instances of NBFCs being downgraded and having their loans recalled after they failed to meet an instalment to a lender.