The recent crisis in the commercial paper market had put the regulatory spot light on NBFC’s borrow-short, lend-long strategy.
NBFCs effectively leveraged from the low interest CP markets to fund home lending with much longer tenors.
Due to the risk in this popular strategy, the Reserve Bank of India is creating new frameworks and reporting standards to monitor asset-liability mismatches in NBFCs. But can this case of over-regulation be avoided?
Why not simply tailor and extend the NSFR reporting requirement under BASEL III to NBFCs?
The Net Stable Funding Ratio requirement is defined as Available Stable Funding / Required Stable Funding > 1, i.e. the available stable funding sources at the NBFC should always be sufficient to cover said requirement. The stability of different funding sources (such as commercial paper) can then be weighted by the regulator to ensure an ideal mix.
NSFR therefore can be a simple metric to monitor stability of liquidity available to NBFCs. Good financial regulation is meant to be light yet effective. You can read more about the NSFR here: https://www.bis.org/fsi/fsisummaries/nsfr.htm
NSFR implementation will also save NBFCs the costs of finally transitioning to a deposit taking Small Bank, under the RBI’s Small Bank License, which is the usual end goal for many NBFCs.
