The Reserve Bank of India has recently carried out special audits with banks to check whether they are holding the appropriate securities to qualify for liquidity coverage ratio, a move that comes at a time when the central bank has expressed concern over sudden deposit outflows that can occur through digital banking channels.
“It was the first ever special audit that the RBI carried out for LCR. There were concerns over how some banks with very high CD (credit to deposit) ratios would be able to show their LCR maintenance,” a source aware of the development said.
“The RBI came out with a general letter last month to banks after carrying out the audit. They went through every single assumption, every single line item to see whether banks were holding the eligible securities for the purpose of LCR computation,” the source said. An email sent to the RBI did not receive a response by the time of publication of this report.
The LCR – which was introduced as an international banking reform after the global financial crisis of 2008 – essentially calls for banks to hold a certain quantity of government bonds which can be liquidated to meet a hypothetical 30-day stress scenario in which outflows occur.
The RBI said in April that recent episodes in some jurisdictions had demonstrated the increased ability of depositors to rapidly withdraw or transfer deposits during times of stress, using digital banking channels. The emerging risks may require a revisit of certain assumptions under the LCR framework, the central bank said, adding that certain modifications were being accordingly proposed.
Banks are required to maintain an LCR of 100%, composed of high-quality liquid assets – government bonds. The LCR comes on top of another reserve requirement that India banks must maintain – the statutory liquidity ratio (SLR). The SLR is also made up of government bond holdings, with banks mandated to set aside 18% of deposits in sovereign bonds. Given the fact that the securities required for the maintenance of SLR and LCR are largely the same, the RBI has permitted banks to use a progressively increasing proportion of SLR bonds for consideration as LCR.
Banks, however, are faced with a situation where growth in credit continues to outpace growth in deposits, leading to lenders needing to mobilise funds. In the current scenario, after setting aside funds from their deposits for the mandatory reserve requirements, banks must either issue securities to raise funds or increase their deposit rates. This exerts pressure on banks’ interest margins.
“Banks have communicated to the RBI that some of the intraday LCR maintenance norms can be punitive for lenders,” another source said. “For the RBI, the focus on LCR basically stems from ensuring that the system is resilient in case there were to be quick retail outflows. That is why they have been asking banks for behavioural data on deposits,” the source said.
CD ratio of commercial banks, including the impact of the merger between HDFC and HDFC Bank was at 79.79 during the fortnight ended May 17, according to the data released by the central bank. The CD ratio measures the portion of a bank’s deposits being disbursed as loans. As such it is a crucial indicator of bank liquidity.
