Deposit Ceiling, Liquid Assets and a Maturity Mismatch
Sahara Rural Finance is an NBFC-D with net owned funds of ₹300 crore. It has public deposits outstanding of ₹410 crore, of which ₹165 crore mature within three months. On the asset side, ₹520 crore of its ₹610 crore loan book is 5-7 year secured loans to small road transporters; the rest is cash and bank balances of ₹25 crore and unencumbered government securities of ₹30 crore. It has no committed bank lines. The treasurer proposes a new 13-month deposit scheme at 9.8% to repay the maturing deposits and fund disbursements. The company's CRAR is 16.1%. Its last RBI inspection was 20 months ago. The board asks whether it can launch the scheme next week. Its deposits are rated A1 by a credit rating agency; the rating is due for review.
1. Compute the public deposit ceiling and the statutory liquid asset requirement. Is the company compliant? Show the calculations.
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Deposit ceiling: a deposit-taking NBFC may accept public deposits up to 1.5 times its net owned funds.
- Ceiling = 1.5 × ₹300 crore = ₹450 crore.
- Outstanding deposits = ₹410 crore.
- Headroom = ₹40 crore.
On this test alone, the company has room, though only ₹40 crore.
Liquid assets: Section 45-IB requires a deposit-taking NBFC to maintain liquid assets in unencumbered approved securities equal to at least 15% of public deposits outstanding.
- Requirement = 15% × ₹410 crore = ₹61.5 crore.
- Eligible holding = unencumbered government securities of ₹30 crore.
- Shortfall = ₹31.5 crore.
Cash and bank balances of ₹25 crore are not approved securities for this purpose. The company is therefore not compliant with the liquid asset requirement. It should restore the shortfall before accepting fresh deposits, because every new deposit increases the required buffer.
2. Assess the asset-liability mismatch and the treasurer's proposal. Should the board approve the 13-month scheme?
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The proposal should not be approved in its current form.
The mismatch is structural. ₹165 crore of ₹410 crore deposits - about 40% - mature within three months. Against that, the company has only ₹30 crore of eligible liquid securities and ₹25 crore of cash/bank balances. Meanwhile, ₹520 crore of the ₹610 crore loan book is in 5-7 year transporter loans, which are illiquid and cannot be sold quickly without a discount.
The proposal worsens the mismatch. A 13-month deposit scheme would raise short-term liabilities to fund long-term loans. It replaces maturing deposits with new deposits of similar or shorter duration, increasing rollover risk. The 9.8% rate may attract rate-sensitive deposits that will leave at the first sign of stress.
A better response would include:
- extending liability duration where possible;
- arranging committed bank lines or refinance;
- securitising or selling down part of the transporter loan book;
- slowing disbursements until liquidity is rebuilt;
- holding a larger buffer of approved securities and cash.
The board should reject the scheme until the liquid asset shortfall is cured and an ALM stress test shows that the three-month gap is manageable.
3. What regulatory and governance actions should the board take now?
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The board should treat the liquid asset shortfall as a statutory compliance issue, not a treasury inconvenience.
- Restore compliance: bring approved securities to at least ₹61.5 crore, and keep the buffer aligned to deposits as they change.
- Pause deposit growth: do not launch a new scheme while in shortfall. Fresh deposits would increase the required liquid assets and deepen the breach.
- Stress test: model a run-off of the ₹165 crore maturing deposits and identify the funding sources available under stress.
- Governance: constitute or activate a board-level ALM committee, set maturity-gap limits, and require monthly reporting to the board.
- Disclosure and escalation: minute the breach and the remediation plan. Consider whether the position requires notification to RBI, and ensure the statutory auditor and internal audit are informed.
- Capital: CRAR of 16.1% is above the 15% minimum but the buffer is thin relative to the risk. Growth should be constrained until capital and liquidity are rebuilt.
The rating agency review is also relevant: a liquidity shortfall and reliance on short-term deposits could affect the rating and the cost of funds.