In response to the growing number of mobile and internet banking users, the Reserve Bank of India (RBI) has proposed stricter regulations concerning the liquidity coverage ratio (LCR)and Liquidity Norms for Mobile. The proposed changes aim to manage the increasing risks associated with the rapid transformation of banking, particularly with the rise in instantaneous bank transfers and withdrawals enabled by technology.
Liquidity Norms for Mobile Enhanced Run-Off Factors for Retail Deposits
The RBI has suggested additional Liquidity Norms for Mobile run-off factor of 5 percent on both stable and less stable retail deposits that are facilitated by Internet and mobile banking (IMB) services. Run-offs refer to the unexpected withdrawals of deposits by individuals or businesses. Under the new guidelines, stable retail deposits with IMB facilities will have a 10 percent run-off factor, while less stable deposits will face a 15 percent run-off factor. In comparison, deposits from non-financial corporations will have a much higher run-off factor.
The draft guidelines also state that “unsecured wholesale funding provided by non-financial small business customers shall be treated in accordance with the treatment of retail deposits.” Currently, banks are required to maintain a 100 percent liquidity coverage ratio, meaning their stock of high-quality liquid assets (HQLA) should at least equal their total net cash outflows. This ensures that banks have enough HQLA to survive a 30-day acute stress scenario, promoting short-term resilience to potential liquidity disruptions.
Implications for Banks and Implementation Timeline
The new norms stipulate that Level 1 HQLA in the form of government securities should be valued at no more than their current market value, adjusted for applicable haircuts in line with the margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF). Given the current environment where credit growth consistently outpaces deposit growth, these norms could further pressure lenders regarding resource mobilization. The RBI has been encouraging banks to moderate their credit-deposit ratio due to the lagging growth of liabilities.
The proposed changes are scheduled to come into effect on April 1, 2025. The RBI has invited comments on the draft circular from banks and other stakeholders by August 31. According to Anil Gupta, Senior Vice President and Co-Group Head (Financial Sector Ratings) at ICRA, these changes will necessitate banks to hold higher amounts of liquid assets, particularly government securities (G-secs), to meet the new LCR requirements. This could impact the banks’ LCRs adversely but will ultimately strengthen their liquidity position.
Gupta added, “The proposed changes are positive for strengthening the liquidity position of the banks, and banks are likely to build up their G-sec holdings in the run-up to the implementation of these guidelines. This will aid in achieving regulatory directives of moderating the credit-to-deposit ratio of banks.”
Overall, the RBI’s proposed tightening of Liquidity Norms for Mobile aims to enhance the stability and resilience of banks in the face of increasing technological advancements and associated risks in the banking sector.
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