India plans liquidity buffer at shadow banks to aid stressed sector

The Reserve Bank of India (RBI) on Friday proposed introducing a liquidity coverage ratio (LCR) for large non-banking finance companies (NBFC) to help tackle liquidity problems in the sector.

The central bank said it planned to implement LCR, a liquidity buffer, “in a calibrated manner” over four years starting from April 2020.

The LCR is proposed for all deposit taking NBFCs, and non-deposit taking NBFCs with an asset size of 50 billion rupees ($ 720 million) and above.

NBFCs will have to maintain minimum high quality liquid assets of 100% of total net cash outflows over the following 30 calendar days.

Sources told Reuters this week that the central bank was concerned about liquidity issues facing some of the so-called shadow banks such as mortgage or auto lenders and wants to ensure the problems do not become a systemic issue.

The collapse of the Infrastructure Leasing and Financial Services (IL&FS) last year triggered a series a defaults across the shadow banking sector, as borrowing costs for the sector surged.