MUMBAI: The Reserve Bank of India (RBI) will soon issue a draft circular to review the liquidity coverage ratio (LCR) for banks, Governor Shaktikanta Das said in his monetary policy speech on Friday. According to bankers, this may result in more liquidity buffer to be maintained by banks.
While dealing with increased financial distress, banks look to the central bank or the government to come to their rescue. LCR is the financial shield that protects a bank from an impending bankruptcy
Banks covered under 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. However, the recent episodes in some jurisdictions have demonstrated the increased ability of the depositors to quickly withdraw or transfer deposits during times of stress, using digital banking channels observed Das.
"Such emerging risks may require a revisit of certain assumptions under the LCR framework. Therefore, certain modifications to the LCR framework are being proposed towards facilitating better management of liquidity risk by the banks. A draft circular in this regard shall be issued shortly for comments of all stakeholders,” he said.
According to Mandar Pitale, head treasury, SBM Bank (India) Limited, “The review of LCR framework for managing liquidity risk, due to the increased ability of the depositors to quickly withdraw or transfer deposits during times of stress, using digital banking channels may result in more liquidity buffer to be maintained by Banks.
Anil Gupta, Co Group Head, financial sector ratings at ICRA Ltd said, “Typically the savings deposits attract a lower outflow rate of 5 per cent in next 30 days while calculation of the LCR. However, the saving deposits mobilised through higher interest rate on saving accounts are not only interest sensitive but may also be prone to higher run-off in any adverse development at a bank.”
"Further, the actual outflow rates for some of the saving deposits may also be higher than 5 per cent and hence proposal to review the LCR framework is positive from the liquidity risk management of banks.This may require some banks to hold higher HQLAs, which in-turn could result in lower interest margins as well as lower credit to deposit ratios for some banks,” added Gupta.
