Mumbai: Indian banks want the industry regulator to ease the existing liquidity coverage mandate to free up more funds for lending at a time when Mint Road has cautioned financiers about deposits trailing credit disbursements in a booming economy, potentially creating future asset-liability imbalances for the lenders.
Banking industry executives told ET that the lenders have urged the Reserve Bank of India (RBI) to relax the mandate in such a way that they would be required to set aside less funds in highly liquid investments, thus allowing them to lend more with the surpluses extracted from an easier liquidity coverage ratio (LCR) mandate. The requests coincide with a near-80 aggregate credit-deposit ratio for the industry, with banks often selling bond holdings to meet increasing demand for loans.
“The request from the banks to the RBI is to reduce the outflow factor for the segments under which corporates and other legal entities belong from 40% and 100%, respectively,” a top banking source aware of the development said. “This would bring down the denominator for the calculation of LCR, which automatically makes LCR compliance go up and opens up more space for lending.”
Sources said banks have asked the RBI to consider relaxing what are referred to as ‘runoff factors’ or ‘outflow factors’ under the LCR for two brackets of deposits. At present, banks’ liabilities from non-financial corporates have a run-off factor of 40%, while liabilities from other legal entities have a run-off factor of 100%. This means over a hypothetical 30-day period of stress, that quantum of such deposits – 40% and 100%, respectively, in the cases illustrated above – could flow out from the lender.
Hence, banks must maintain a sufficient buffer of high-quality liquid assets to match such a hypothetical outflow.
However, if the RBI eases the mandate, banks will need to park less money under what is categorized as High Quality Liquid Assets (HQLA) – or securities that ensure a bank can meet sudden outflow pressures.
An email sent to the RBI requesting a comment on the matter remained unanswered.
Of Subprime Vintage
The LCR – introduced in the aftermath of the subprime crisis as a banking reforms measure globally – essentially calls for banks to hold a certain quantity of government bonds that can be liquidated to meet a hypothetical 30-day stress scenario in which outflows occur.
The regulatory leeway sought by banks comes amid the possibility of the RBI laying down stricter LCR norms for another set of deposits -insured and uninsured retail deposits – especially after the crisis in the US-based Silicon Valley Bank in 2023. That regional bank in the US had seen a cascade of retail outflows, which were exacerbated by instant banking channels, sources said.
The RBI said in April that it would review the LCR framework.
Sources said that during the discussions with the RBI, Mint Road has requested banks to provide historical behavioural data on the movement of deposits in the brackets for which lenders have requested the relaxations.
Stable Vs Less Stable
“There is a chance that the RBI may increase the outflow factor for what it calls the ‘stable’ and ‘less stable’ retail deposit buckets for LCR computation from the current level of 5% and 10% because of the experience with the Silicon Valley Bank. What banks have been saying is that in the other buckets such as corporate and other legal entities, the risk of sudden outflows is not as serious as to call for a 100% outflow factor,” another source said.
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. HQLA comprises banks’ investments in government securities.
India banks are also mandated to maintain Statutory Liquidity Ratio (SLR), according to which lenders must invest a portion of their deposits in highly liquid assets such as government bonds. The SLR is currently at 18% of net demand and time liabilities – a proxy for deposits. Banks must also set aside 4.5% of their deposits as Cash Reserve Ratio (CRR) with the RBI.
