Liquidity Risk Management Framework

Important aspects of Liquidity Risk Management Frame Work shall be as follows:

  1. Liquidity Risk Management Policy, Strategies and Practices

    The Company shall maintain sufficient liquidity, including a cushion of unencumbered, high quality liquid assets to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources.

    Key elements of the liquidity risk management framework shall be as under:

    1. Governance of Liquidity Risk Management

      The organisational set up for liquidity risk management shall be as under:

      1. Board of Directors

        The Board shall have the overall responsibility for management of liquidity risk. The Board shall ensure the compliance of the Company to the liquidity risk management framework prescribed by RBI.

      2. Risk Management Committee

        The Risk Management Committee, which reports to the Board and consists of Director-Finance and Chief Operating Officer (COO) of the Company shall be responsible for evaluating the overall risks faced by the Company including liquidity risk.

      3. Asset-Liability Management Committee (ALCO)

        The ALCO headed by the Director-Finance and consisting of the Chief Operating Officer (COO) of the Company(along with other Directors) shall be responsible for ensuring adherence to the ratios and limits as prescribed in the RBI Guidelines on liquidity risk management framework. The ALCO already reviews the liquidity position of the Company on the basis of the quarterly ALM Return being filed with RBI.

      4. Asset Liability Management (ALM) Support Group

        The ALM Support Group consisting of Senior Manager (Deposits) and Manager (Compliance) shall analyse, monitor and report the liquidity risk profile to the ALCO.

    2. Liquidity risk Tolerance

      The Company shall regularly identify, measure, monitor and control liquidity risk by maintaining sufficient liquidity.

    3. Liquidity Costs, Benefits and Risks in the Internal Pricing

      Considering the benefits of maintaining sufficient liquidity the Company shall incorporate the liquidity costs in the cost of funds. The Company will then continuously monitor its lending rate so that it remains commensurate with the lending rates of the rivals in the market.

    4. Off-balance Sheet Exposures and Contingent Liabilities

      Though the Company has no Off-balance Sheet Exposures and a nil amount of Contingent Liability it shall keep track of the liquidity risk that may arise on account of these exposures.

    5. Funding Strategy - Diversified Funding

      As has been the practice in the past the Company shall continue to have diversified sources of funding and shall continue to maintain strong relationships with fund providers. It has been able to raise funds quickly from its funding sources in the past and shall regularly gauge its capacity to do so in future. The Company has been keeping a track of the deposit renewals/ withdrawals in the past and it has observed that the renewal rate is consistently on the higher side even in stressed market conditions. The Company shall continue to monitor the situation regularly.

    6. Collateral Position Management

      The Company shall actively manage its collateral positions, differentiating between encumbered and unencumbered assets. Further, the Company shall always maintain sufficient collateral to meet expected and unexpected borrowing needs.

    7. Stress Testing

      Stress testing shall always be an integral part of the overall governance and liquidity risk management culture in the Company. As the Company is engaged in simple borrowing and lending products, it has in the past and shall continue to monitor the major funding and market liquidity risks to which it can be exposed. The Company shall maintain sufficient liquidity to overcome these types of risks.

    8. Contingency Funding Plan

      The Company as a part of its Contingency Funding Plan has been and shall continue to maintain sufficient amounts in the assets/ investments which can be encashed/ liquidated immediately.

    9. Public disclosure

      The Company shall publicly disclose information (Appendix I) in the annual financial statement as notes to account that enables market participants to make an informed judgment about the soundness of its liquidity risk management framework and liquidity position.

    10. Intra Group transfers

      The Company does not have any Group Company. If at any time in future there is a Group Company then these Guidelines will be modified accordingly in compliance to the RBI Directions.

  2. Management Information System (MIS)

    The ALM Support Group as mentioned above shall timely and regularly provide information on the liquidity position of the Company to the Board and ALCO. The information so provided shall have all sources of liquidity risk including contingent risks.

  3. Internal Controls

    The Company shall have appropriate internal controls, systems and procedures to ensure adherence to liquidity risk management policies and procedure. These controls shall be in compliance to the RBI Directions.

  4. Maturity Profiling

    1. The Company shall adopt as a standard tool the use of a maturity ladder and calculation of cumulative surplus or deficit of funds at selected maturity dates for measuring and managing net funding requirement of the Company. The Maturity Profile shall be used for measuring the future cash flows in different time buckets. The time buckets shall be distributed as under:

      1. 1 day to 7 days
      2. 8 day to 14 days
      3. 15 days to 30/31 days (One month)
      4. Over one month and upto 2 months
      5. Over two months and upto 3 months
      6. Over 3 months and upto 6 months
      7. Over 6 months and upto 1 year
      8. Over 1 year and upto 3 years
      9. Over 3 years and upto 5 years
      10. Over 5 years
    2. The Company being a Deposit taking Company shall hold the ‘Statutory Liquidity Requirement’ (SLR) Investments as ‘mandatory securities’. Further the Company shall hold the investments made for maintaining liquidity in terms of the Guidelines on Liquidity Risk Management Framework as ‘Non Mandatory Securities’.
    3. The Company shall have its main focus on the short-term mismatches, viz., 1-30/31 days. The net cumulative negative mismatches in the Statement of Structural Liquidity in the maturity buckets 1-7 days, 8-14 days, and 15-30 days shall not exceed 10%, 10% and 20% of the cumulative cash outflows in the respective time buckets. The Company shall not let the net cumulative negative mismatches in the statement of structural liquidity to exceed 20% of the cumulative cash outflows across all other time buckets upto 1year.
    4. The Statement of Structural Liquidity shall be prepared by placing all cash inflows and outflows in the maturity ladder according to the expected timing of cash flows. A maturing liability shall be a cash outflow while a maturing asset shall be a cash inflow.
    5. The Company shall monitor its short-term liquidity on a dynamic basis over a time horizon spanning from 1 day to 6 months. The Company shall estimate its short-term liquidity profiles on the basis of business projections and other commitments for planning purposes.
  5. Liquidity Risk Measurement – Stock Approach

    The Company shall adopt a "stock" approach to liquidity risk measurement and closely monitor certain critical ratios in this regard like short-term liability to total assets, short-term liability to long-term assets, short-term liabilities to total liabilities and long term assets to total assets etc.

    As of now the company has not raised and has no plans to raise any funds through commercial papers or Non-Convertible Debentures (NCDs) having maturity less then one year.

  6. Currency Risk

    As of now the company has not raised and has no plans to raise funds through foreign currency.

  7. Managing Interest Rate Risk (IRR)

    The Company has and shall continue to manage interest rate risk as per the RBI Guidelines.

  8. Liquidity Risk Monitoring Tools

    The Statement of Structural Liquidity is currently one of the prescribed monitoring tools. In addition to this, the following tools shall be adopted by the Company for internal monitoring of liquidity requirements:

    1. Concentration of Funding

      The metric as provided in Appendix 1 shall be used to identify those significant sources of funding, withdrawal of which could trigger liquidity problems. Diversification of funding sources and continuously monitoring data of the significant counterparty and of the significant product / instrument will be done. As per RBI Guidelines A "significant counterparty" is defined as a single counterparty or group of connected or affiliated counterparties accounting in aggregate for more than 1% of the total liabilities of the Company and A "significant instrument/ product" is defined as a single instrument/ product of group of similar instruments/ products which in aggregate amount to more than 1% of the total liabilities of the Company.

    2. Available Unencumbered Assets

      The metric shall provide significant information on available unencumbered assets, which can be immediately liquidated to raise additional funding if required.

    3. Market-related Monitoring Tools

      The ALCO shall continuously keep track of the developments in the market that can lead to potential liquidity difficulties for the Company.

Appendix I: Public disclosure on liquidity risk

  1. Funding Concentration based on significant counterparty (both deposits and borrowings).
    Sr. No. Number of Significant Counterparties Amount (Rs. crore) % of Total deposits % of Total Liabilities
  2. Top 20 large deposits (amount in Rs. Crore and % of total deposit)
  3. Top 10 borrowings (amount in Rs. Crore and % of total borrowings)
  4. Funding Concentration based on significant instrument/ product
    Sr. No. Name of the instrument/product Amount (Rs. crore) % of Total Liabilities
  5. Stock Ratios:

    Other short terms liabilities, if any as a % of total public funds, total liabilities and total assets

Appendix II: Liquidity Coverage Ratio (LCR)

  1. Applicability

    The Company has to adhere to the following guidelines while computing the Liquidity Coverage Ratio being a Deposit taking Company.

  2. Definitions
    1. As per RBI Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them below
      1. "High Quality Liquid Assets (HQLA)" means liquid assets that can be readily sold or immediately converted into cash at little or no loss of value or used as collateral to obtain funds in a range of stress scenarios.
      2. Liquidity Coverage Ratio (LCR) is represented by the following ratio:
      3. "Unencumbered" means free of legal, regulatory, contractual or other restrictions on the ability of the Company to liquidate, sell, transfer, or assign the asset.
    2. All other expressions unless defined herein shall have the same meaning as have been assigned to them under the Reserve Bank of India Act, 1934 or any statutory modification or re-enactment thereto or as used in commercial parlance, as the case may be.
  3. General Guidelines
    1. The Company shall maintain an adequate level of unencumbered HQLA that can be converted into cash to meet its liquidity needs for a 30 calendar-day time horizon under a significantly severe liquidity stress scenario, as specified in these guidelines.
    2. LCR shall be maintained as at C) below on an ongoing basis to help monitor and control liquidity risk.
    3. The LCR requirement has been strictly followed from December 01, 2020 and shall be strictly followed in future with the minimum LCR to be 50%, progressively increasing, till it reaches the required level of 100%, by December 1, 2024, as per the time-line given below:
      From December 1, 2020 December 1, 2021 December 1, 2022 December 1, 2023 December 1, 2024
      Minimum LCR 50% 60% 70% 85% 100%
    4. The LCR shall continue to be minimum 100% (i.e., the stock of HQLA shall at least equal total net cash outflows) on an ongoing basis with effect from December 1, 2024, i.e., at the end of the phase-in period.
      • Provided that the Company shall have the option to use their stock of HQLA, thereby allowing LCR to fall below 100% during a period of financial stress.
      • Provided further that the Company shall immediately report to RBI (Department of Regulation and Department of Supervision) such use of stock of HQLA during a period of financial stress along with reasons for such usage and corrective steps initiated to rectify the situation.
    5. The stress scenario for LCR intends to cover a combined idiosyncratic and market-wide shock that would result in:
      1. Run-off of a proportion of deposits;
      2. A partial loss of unsecured wholesale funding capacity;
      3. A partial loss of secured, short-term financing with certain collateral and counterparties;
      4. Additional contractual outflows that would arise from a downgrade in the Company’s credit rating, including collateral posting requirements;
  4. High Quality Liquid Assets
    1. The Company shall maintain Liquid assets comprising of high quality assets that can be readily sold/ encashed or used as collateral to obtain funds in a range of stress scenarios. They shall be unencumbered. These assets are considered to be high quality liquid assets if they can be easily and immediately converted into cash at little or no loss of value. The liquidity of an asset depends on the underlying stress scenario, the volume to be monetized and the timeframe considered. Nevertheless, there are certain assets that are more likely to generate funds without incurring large discounts due to fire-sales even in times of stress.
    2. The fundamental characteristics of HQLAs include low credit and market risk; ease and certainty of valuation; low correlation with risky assets and listing on a developed and recognized exchange market. The market related characteristics of HQLAs include active and sizeable market; presence of committed market makers; low market concentration and flight to quality (tendencies to move into these types of assets in a systemic crisis).
    3. Assets to be included in the computation of HQLAs are those that the Company is holding on the first day of the stress period. Such assets shall be valued at an amount no greater than their current market value for the purpose of computing the LCR.
      • Considering the above mentioned characteristics of HQLAs the Company shall invest only in Assets to be included as HQLA without any haircut. These assets shall be:
        1. Cash (Cash would mean cash on hand and demand deposits with Scheduled Commercial Banks)
        2. Government securities issued by the Government of India.
    4. For the purpose of computing LCR, the Company shall reckon as HQLA, only to the extent of 80% of the required holding of such unencumbered approved securities, held as per the provisions of section 45 IB of RBI Act.
    5. All assets in the stock of liquid assets shall be managed as part of that pool by the Company and shall be subject to the following operational requirements:
      1. Shall be available at all times to be converted into cash;
      2. Shall be unencumbered;
      3. Shall not be designated as collateral or credit enhancement in structured transactions or designated to cover operational costs;
      4. Shall be managed with sole intent for use as a source of contingent funds; and,
      5. Shall be under the control of specific function/s charged with managing liquidity risk of the Company, i.e. ALCO.
    6. If an eligible liquid asset becomes ineligible (e.g. due to downgrade), the Company shall keep the asset in its stock of liquid assets for an additional 30 calendar days in order to have sufficient time to adjust the stock / replace the asset.
  5. Total net cash outflows

    1. The Company shall calculate the total net cash outflows as defined below as the total expected cash outflows minus total expected cash inflows for the subsequent 30 calendar days. Stressed cash flows is computed by assigning a predefined stress percentage to the overall cash inflows and cash outflows. Total expected cash outflows (stressed outflows) are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by 115% (15% being the rate at which they are expected to run off further or be drawn down). Total expected cash inflows (stressed inflows) are calculated by multiplying the outstanding balances of various categories of contractual receivables by 75% (25% being the rate at which they are expected to under-flow). However, total cash inflows will be subjected to an aggregate cap of 75% of total expected cash outflows. In other words, total net cash outflows over the next 30 days = Stressed Outflows - Min (stressed inflows; 75% of stressed outflows).

      Items of Cash Inflows Items of Cash Outflows
      1. Maturing secured lending transactions backed by HQLA
      2. All other assets
      3. Lines of credit – Credit or liquidity facilities or other contingent funding facilities that the Company holds at other institutions for its own purpose
      4. Other inflows by counterparty
      5. Other contractual cash inflows will be specified as foot notes. a. Deposits
      1. Deposits
      2. Unsecured wholesale Funding
      3. Secured Funding
      4. Additional requirements [(i)+(ii)+(iii)+(iv)]:
        1. Liquidity needs (e.g. collateral calls) related to financing transactions and other contracts where ‘downgrade triggers’ up to and including a 3-notch downgrade.
        2. Increased liquidity needs related to excess non-segregated collateral held that could contractually be called at any time by the counterparty.
        3. Increased liquidity needs related to contractually required collateral on transactions for which the counterpary has not yet demanded the collateral be posted.
        4. Currently undrawn committed credit and liquidity facilities.
        5. Other contingent funding liabilities.
        6. Any other contractual outflows not captured elsewhere in the template.

      Computation of Net cash outflows

      S No. Net Cash outflows over the 30 days period Amount
      A Total Cash Outflows
      B Stressed Cash Outflows (A*115%)
      C Total Cash Inflows
      D Stressed Cash Inflows (C*75%)
      E Total net cash outflows over the next 30 days = Stressed Outflows (B) - Minimum of (Stressed Inflows (D); 75% of Stressed Outflows(B)).
    2. The Company shall not double count items, i.e., if an asset is included as part of the "stock of HQLA" (i.e., the numerator), the associated cash inflows cannot also be counted as cash inflows (i.e., part of the denominator). Where there is potential that an item could be counted in multiple outflow categories (e.g., committed liquidity facilities granted to cover debt maturing within the 30 calendar day period), the Company shall assume up to the maximum contractual outflow for that product.
  6. LCR Disclosure Standards
    1. The Company shall calculate and disclose information on its LCR every quarter. Further, the Company shall in its annual financial statements under Notes to Accounts, starting with the financial year ending March 31, 2023, shall disclose information on LCR for all the four quarters of the relevant financial year in the format as given in the Appendix I.
    2. In addition to the disclosures required by the format given in Appendix I, the Company shall provide sufficient qualitative discussion (in their annual financial statements under Notes to Accounts) around the LCR to facilitate understanding of the results and data provided.
      Appendix I: LCR Disclosure Template
      (Rs. in Crore) Total Unweighted * Value (average) Total Weighted** Value (average)
      High Quality Liquid Assets
      1 ***Total High Quality Liquid Assets (HQLA)
      Cash Outflows
      2 Deposits (for deposit taking companies)
      3 Unsecured wholesale funding
      4 Secured wholesale funding
      5 Additional requirements, of which
      (i) Outflows related to derivative exposures and other collateral requirements
      (ii) Outflows related to loss of funding on debt products
      (iii) Credit and liquidity facilities
      6 Other contractual funding obligations
      7 Other contingent funding obligations
      8 TOTAL CASH OUTFLOWS
      Cash Inflows
      9 Secured lending
      10 Inflows from fully performing exposures
      11 Other cash inflows
      12 TOTAL CASH INFLOWS
      Total Adjusted Value
      13 TOTAL HQLA
      14 TOTAL NET CASH OUTFLOWS
      15 LIQUIDITY COVERAGE RATIO (%)

      *** Components of HQLA need to be disclosed.
      ** Weighted values must be calculated after the application of respective haircuts (HQLA) and stress factors on inflow and out flow.
      * Unweighted values must be calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows).