The National Bank for Agriculture and Rural Development, (NABARD) on July 30, 2024, issued the Guidance Note on Liquidity Risk Management (LRM).
This guidance note also emphasizes the importance of managing liquidity to meet obligations promptly, minimizing risk through robust organisational and governance structures viz. the Board of Directors (BoD), Risk Management Committee (RMC), Asset-Liability Management Committee (ALCO), and ALM Support Group.
Guidance note elaborates that SEs should define their liquidity risk tolerance, funding strategies, and prudent limits, and establish a system for measuring, evaluating, and regularly reporting liquidity. Stress tests should be conducted under various hypothetical scenarios, and a formal contingency funding plan should be developed and maintained. The board or a designated committee should oversee and annually review these policies and practices.
It is elaborated in the guidance note that a Contingency Funding Plan (CFP) should be prepared by SEs which outlines strategies for addressing liquidity shortfalls during emergencies, detailing diverse funding measures. Banks should establish a reliable Management Information System (MIS) to provide timely liquidity insights to the board and ALCO, covering all forms of liquidity risk and providing detailed information during stress periods. Regular examination and assessment of the liquidity risk management process should align with regulatory directives and internal policies, identifying significant issues for prompt corrective action.
SEs are advised to put in place appropriate mechanisms to implement the Liquidity Risk Management policies and the relevant frameworks as mentioned in the guidance note by 31 March 2025
[Notification No. 141/DoS-13/2024]
