Commercial banks have started applying higher outflow rates to retail deposits in preparation for upcoming revisions to Liquidity Coverage Ratio (LCR) rules that mandate the purchase of more high-quality liquid assets. Banking regulators are expected to issue revised LCR rules to reduce risks arising from the mass withdrawal of deposits that triggered the US Silicon Valley bank failure.
Although the Reserve Bank of India has not yet issued final guidelines on the revised LCR regulations, banks said they are likely to come into effect on April 1 next year.
Axis Bank, which announced its second quarter results last week, said its average LCR had fallen because it had applied a higher outflow rate than prescribed by the RBI. LCR was 115%, down 5 points compared to the June quarter.
ET Bureau HDFC Bank’s LCR rose to 128% in the second quarter from 123% in June. Buoyed by strong deposit growth and slowing advance growth, HDFC Bank has opted to increase its liquid assets and LCR ratio to absorb the expected negative impact of upcoming regulatory changes.
The proposed rules would direct banks to invest more funds in high-quality liquid assets to prepare for mass withdrawals by depositors. These assets, primarily government bonds, could be rapidly liquidated in a hypothetical stress episode in which lenders offering internet and mobile banking facilities face rapid withdrawals and transfers. The RBI said in the draft rules that while the increased use of technology has facilitated instant bank transfers and withdrawals, the new-age mode of banking has also led to increased risks associated with it.
RBI said banks should allocate an additional 5 per cent outflow factor for retail deposits that have Internet and Mobile Banking (IMB) facility available. Therefore, stable retail deposits enabled with IMB have an outflow rate of 10%. For low stability deposits enabled with IMB, this will be 15%.
ET reported on September 3 that banks expect the regulator to impose an additional “run-off factor” of between 2% and 2.25% on the 5% increase stipulated in recent draft guidelines. It was hinting. Some banks also proposed gradual increases beyond 3%. It took years to maintain a liquid stock. Banks are not very confident that the central bank will significantly ease LCR regulations, so they are preparing for it.
Analysts estimate that demand for short-term government bonds could increase by Rs 400,000-500,000 crore if the new rules come into effect.
For banks, the problem with the proposed changes is the common scenario where credit grows faster than deposits. With banks already competing to mobilize individual deposits, a new increase in the reserve requirement ratio would force funds to be invested in low-yield government bonds. Industry players said this is putting pressure on banks’ lending capacity and interest margins.
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