Banks have made representations to the Reserve Bank of India (RBI) urging flexibility on maintenance of a key reserve requirement at a time when the central bank is taking stock of lenders’ preparedness for sudden deposit outflows in the era of 24×7 banking transactions, especially after such events roiled US regional banks last year.
Lenders have asked the RBI to permit the compulsory portion of funds set aside for the maintenance of the Cash Reserve Ratio (CRR) to be made eligible as High Quality Liquid Assets (HQLA) for the purpose of computing Liquidity Coverage Ratio (LCR), sources aware of the developments told ET.
Such a step would give banks breathing space to meet a potentially increased LCR requirement in the event of a change in the RBI’s classification of certain categories of deposits, sources said.
An email sent to the RBI seeking comment on the matter did not receive a response until Thursday press time.
Last week, the RBI said that certain modifications to the LCR framework were being proposed to bring about better liquidity risk management by banks. The central bank flagged recent episodes in some jurisdictions which have demonstrated the ability of depositors to withdraw or transfer deposits rapidly during times of stress – a phenomenon which occurred with the US-based Silicon Valley Bank last year.
Outflow Factor
The RBI has regularly been asking banks for data on the portion of insured and uninsured deposits, and the maximum transactions allowed under instant banking channels, sources said.
“There is a possibility that the RBI may roll out changes in how it looks at the stable and less stable retail deposit buckets for LCR, specifically what the central bank calls the outflow factor,” a source said.
“There is an outflow factor of 5% for deposits that are insured and 10% for those that are not. That could now be increased in which case banks would need to set aside more of their funds for purchasing HQLA to meet an increased LCR requirement,” the source said.
An increased LCR requirement would call for deft handling of their funds by banks in an environment of strong demand for loans and lenders’ need to set aside precautionary funds to meet any sudden outflows that occur through instant banking channels.
Indian banks are mandated to set aside a portion of their deposits for maintenance of CRR and the Statutory Liquidity Ratio (SLR) which is primarily composed of investments in government bonds. The CRR is currently at 4.5% of deposits, while the SLR is at 18%.
Soaring Volumes
Following the global financial crisis of 2007-08, the Basel Committee on Banking Supervision introduced the LCR, which calls for maintenance of HQLA sufficient to meet 30 days of net outflows under conditions of stress. Given that the assets required for meeting SLR and LCR are broadly the same, the RBI allows banks to use a portion of SLR assets for LCR computation.
Last month the RBI said that from 2014 to 2023, the National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) systems have clocked growth of 700% and 200%, respectively, in terms of volume. In value terms the NEFT and the RTGS grew 670% and 104%, respectively, over the period, the RBI said.
The NEFT started functioning on a 24×7 basis for 365 days of the year from December 16, 2019, while the same was facilitated for the RTGS from December 14, 2020.
