Excerpt from EconomicTimes Article – Published on Feb 06, 2024
In a recent development, the Reserve Bank of India (RBI) has imposed a fine of Rs 8.80 lakh on the state-owned Power Finance Corporation. The penalty comes in response to the company’s failure to maintain the mandated liquidity coverage ratio (LCR) as per the central bank’s guidelines on liquidity risk management for non-banking financial companies.
According to the RBI’s statement released on Tuesday, the regulatory inspection conducted on Power Finance Corporation’s financial position as of March 31, 2022, revealed shortcomings in its liquidity management practices. Specifically, the company was found to have not upheld the prescribed liquidity coverage ratio of 60% by the stipulated date. The central bank attributed the corporation’s failure to comply with the LCR requirement to the inclusion of ineligible assets as high-quality liquid assets (HQLA). The liquidity coverage ratio mandates entities to maintain adequate HQLA to offset a specified number of outflows, with government securities primarily constituting HQLA.
The RBI clarified that its action against Power Finance Corporation is centered on identified deficiencies in regulatory compliance and does not intend to question the validity of any transactions or agreements between the company and its customers. Liquidity risk management remains a critical aspect of financial institutions’ operations, particularly in ensuring their ability to meet short-term obligations and withstand unforeseen liquidity pressures. Non-compliance with regulatory liquidity norms can expose companies to heightened financial risks and regulatory scrutiny.
The imposition of fines by regulatory authorities underscores the importance of adherence to prudential norms and regulations aimed at maintaining financial stability and safeguarding the interests of stakeholders. The penalty on Power Finance Corporation serves as a reminder to financial entities regarding the imperative of robust liquidity risk management frameworks and diligent adherence to regulatory requirements to mitigate potential risks and uphold financial integrity.
To delve deeper into this topic, please read the full article in EconomicTimes.