Relevance : GS Paper III
Theme of the Article
The RBI’s draft norms for non-banking financial companies are timely.
Why has this issue cropped up?
RBI has released draft norms for NBFCs.
The proposed norms
- NBFCs would have to comply with a higher liquidity coverage ratio (LCR).
- NBFCs would have to maintain their LCR at 60% of net cash outflows initially, and improve it to 100% by April 2024.
Why new norms for NBFCs?
- NBFCs are struggling to meet their obligations to various lenders.
- NBFCs run the risk of being unable to pay back their borrowers on time.
Impact of these rules on NBFCs
- Put significant pressure on the margins of NBFCs.
- NBFCs may be forced to park their money in low-risk liquid assets.
- Positive long term impact on the health of NBFCs and financial sector.
- The new norms would discourage NBFCs from borrowing over short term.
- This could compel NBFCs to shrink the scope of their lending.
Conclusion
The latest liquidity norms for NBFCs are still necessary to ward off systemic crises.
