RBI to modify LCR framework to facilitate better management of liquidity risk by banks

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The Reserve Bank of India (RBI) is planning to make certain modifications to the Liquidity Coverage Ratio (LCR) framework to facilitate better management of liquidity risk by banks.

Governor Shaktikanta Das noted that 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.

Such emerging risks may require a revisit of certain assumptions under LCR framework, he added.

Banks covered under Liquidity Coverage Ratio (LCR) framework are required to maintain a stock of high quality liquid assets (HQLA) to meet 30 days net outgo under stressed conditions. They are are required to maintain LCR of 100 per cent with effect from January 1, 2019.

At present, the assets allowed as Level 1 High Quality Liquid Assets (HQLAs), inter alia, included among others within the mandatory SLR (statutory liquidity ratio) requirement, Government securities to the extent allowed by RBI under (i) Marginal Standing Facility (MSF) and (ii) Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) [15 per cent of the bank’s deposits with effect from April 1, 2020]. 

The LCR of Scheduled Commercial Banks was comfortable at 131.4 per cent, much above the minimum stipulation of 100 per cent

Entire SLR-eligible assets held by banks are permitted to be reckoned as HQLAs for meeting LCR.

Anil Gupta, Senior Vice-President, Co Group Head – Financial Sector Ratings, ICRA, said: “Typically the savings deposits attract a lower outflow rate of 5 per cent in next 30 days for 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% and hence the 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.”