NBFCs seek easing of LCR norms, propose graded haircuts for bonds; finance ministry asks RBI to review industry demand

Non-banking financial companies have urged the finance ministry to ease liquidity coverage ratio (LCR) norms by introducing graded haircuts for corporate bond investments, instead of the current flat 50% haircut for bonds rated ‘A’ and below.

The finance ministry has asked the Reserve Bank of India to examine the proposal, two people aware of the matter said.

The Department of Financial Services (DFS) discussed the issue with NBFC representatives earlier this month. Participants said a graded system would encourage investments in more liquid assets, especially during periods of stress, according to people familiar with the discussions.


Emails sent to RBI and DFS remained unanswered till press time.

At present, NBFCs face a 15% haircut on bonds rated between ‘AAA’ and ‘AA-’, and 50% on instruments rated ‘A’ and below.

"If a further graded system is introduced, NBFCs which invest in lower rated papers will be benefitted," a chief financial officer with a large non-bank lender said.

He added that there is currently no LCR advantage in investing in ‘A’-rated instruments over riskier assets.

"A graded haircut system will create incentive to invest in instruments with lower risk," he said.

A haircut in LCR terms refers to a regulatory reduction in the market value of high-quality liquid assets to account for potential price volatility during stress.

"Corporate bonds count as part of high quality liquid assets, subject to 50% haircuts for ‘A-’ to ‘BBB-’ rated bonds. The same haircut is applicable to banks. The same is also prescribed by Basel III norms. Therefore, RBI may not deviate from a settled global norm on a matter which has international congruence," said Vinod Kothari, an independent financial consultant.

The LCR is a key requirement under the Basel III framework mandating both banks and non-banks, including housing finance companies, to maintain a liquidity buffer to manage short-term risks. The buffer, held in high-quality liquid assets, must be sufficient to meet expected net cash outflows over 30 days during periods of acute stress.