MUMBAI: The Reserve Bank has issued draft guidelines, mooting a new framework to calculate banks’ liquidity coverage ratios that will boost their liquidity resilience under the Basel-III framework on liquidity standards.
The central bank on Thursday proposed that going forward banks value their high quality liquid assets, kept in the form of government securities, at no greater than their current market rate. This value should be adjusted for applicable haircuts in line with the margin requirements under the liquidity adjustment facility and marginal standing facility, the RBI said in the draft guidelines.
The statement further said it plans to implement the new framework from April 1, 2025 and said the new norms are aimed at bolstering the liquidity resilience of lenders amid risks involved with the increased usage of technology in banking.
"While increased usage of technology has facilitated the ability to make instantaneous bank transfers and withdrawals, it has also led to a concomitant increase in risks, requiring proactive management," the monetary authority said in the draft circular.
The proposed measures include mandating banks to assign an additional 5 percent run-off factor for retail deposits which are enabled with the Internet and mobile banking facilities. Lenders can experience "runoff" when individuals and businesses withdraw money to invest in other higher-paying investments, thereby reducing the banks' total capital.
It may be noted that in the April monetary policy, governor Shaktikanta Das had proposed changes in the liquidity coverage ratio (LCR) framework to successfully meet liquidity risks.
The LCR is a liquidity requirement for banks to maintain at all times a certain proportion of high-quality liquid assets (HQLA), including cash, reserves with the central bank, and central government bonds, which can easily be converted into cash.
The RBI has sought feedback until the end of August.
The central bank further said banks covered under the LCR framework are required to maintain a stock of high quality liquid assets (HQLA) to cover the expected net cash outflows in the next 30 calendar days.
The liquidity crisis some Western banks faced in the early part of this fiscal after massive withdrawals demonstrated increased ability of depositors to quickly withdraw or transfer deposits during times of stress, using digital banking channels. Such emerging risks may require a revisit of certain assumptions under the LCR framework, the RBI said. Therefore, certain modifications to the LCR framework are being proposed towards facilitating better management of liquidity risk by the banks.
The RBI further said under the proposed LCR framework, banks shall assign an additional 5 percent run-off factor for retail deposits which are enabled with Internet and mobile banking facilities—that means stable retail deposits enabled with these digital facilities shall have 10 percent run-off factor and less stable deposits enabled shall have 15 percent run-off factor.
Unsecured wholesale funding provided by non-financial small business customers should be treated in accordance with the treatment of retail deposits, the draft circular said.
The RBI said in case a deposit, hitherto excluded from LCR computation such as a non-callable fixed deposit, is contractually pledged as collateral to a bank to secure a credit facility or loan, such deposit shall be treated as callable for LCR purposes.
The central bank also said the new norms will be applicable to all commercial banks, excluding payments banks, regional rural banks and local area banks).
Commenting on the impact of the proposed liquidity framework, Anil Gupta, a senior vice-president and co-group head of financial sector ratings at the Icra Ratings said, given the significant penetration of digital banking, the changes proposed are likely to increase the outflows in the next 30-day bucket for banks, thereby posing higher requirements of HQLAs. Additionally, the applicability of haircuts on Gsecs for inclusion in HQLA is likely to reduce the value of existing HQLAs for LCR computation.
“Overall, this will pose requirements for higher liquid assets (G-secs) for banks to shore up their LCRs, which will be adversely impacted by the new guidelines. The proposed changes are positive for strengthening the liquidity position and banks are likely to build up the G-sec in run up to the implementation of these guidelines, which will further aid in achieving regulatory directives of moderating credit to deposit ratios,” Gupta said.
