India Ratings and Research (Ind-Ra) believes the proposed draft guidelines on creating a liquidity framework for non-banking financial companies (NBFCs) will enforce on-balance sheet liquidity maintenance through the cycle and be conducive for developing holistic liquidity management contour. The agency believes the guidelines will also disincentive NBFCs from relying heavily on short-term financing options. However, the proposed framework is unlikely to have any meaningful impact on addressing the current environment of high risk aversion.
Adverse Impact on Mutual Fund Inflows: Ind-Ra believes the proposed LCR framework will reduce NBFCs’ investment parked in mutual funds. In general, NBFCs maintain some cash & cash equivalent buffer for operational purposes. However, in the last few quarters, many NBFCs have increased their liquidity buffer by maintaining a considerable amount of liquid assets depending on the ability to mobilise funds. Ind-Ra believes more often than not, the amount parked in a liquid mutual fund or other related money market assets is to reduce opportunity cost. As per the proposed circular, investments in liquid mutual fund, bank fixed deposit or certificate of deposit are excluded from the list of HQLA, largely to contain industry-specific counter-party risk.
Corporate CP to Benefit: As
opposed to the commercial papers (CPs) issued by NBFCs, CPs issued by
corporates (by issuers rated AA- and above) are included in the HQLA basket
with an applicable haircut of 15%. The agency believes NBFC will be more
inclined to invest in corporate CPs given their limited duration and higher
yield, which could reduce the opportunity cost of maintaining LCR. In that case,
the spread between corporate CPs and the CPs issued by NBFCs will widen. Moreover,
the incremental demand from NBFCs for money market instrument will be
constructive for the money market yield curve.
Additional information is available at www.indiaratings.co.in.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.