RBI guidelines on liquidity standards credit positive for banks: Moody’s

Our Bureau Updated - November 24, 2017 at 11:18 PM.

Will encourage banks to improve asset liability management

The Reserve Bank of India’s guidelines on liquidity standards are credit positive for Indian banks, according to Moody’s Investors Service.

The guidelines, which were issued last week, relate to minimum liquidity coverage ratio (LCR), liquidity risk monitoring tools and LCR disclosure standards.

The aim is to promote bank liquidity.

Liquidity risk
The LCR is designed to address short-term liquidity risk by ensuring that banks hold sufficient cash and other liquid assets to meet obligations in a 30-day market stress scenario.

In Moody’s view, these guidelines will encourage banks to improve asset-liability management because of the penalties associated with maturity mismatches, especially in short-term buckets.

“The requirement creates a credit-positive incentive for banks to focus on growing their retail deposits and reducing reliance on short-term wholesale funding,” it said in a statement.

The RBI will phase in LCR with a minimum requirement of 60 per cent starting January 1, 2015, rising 10 percentage points annually till it reaches 100 per cent on January 1, 2019.

Basel Committee The Global credit rating agency said the RBI’s framework on LCR aligns broadly with the framework of the Basel Committee on Banking Supervision.

At the same time, the central bank encouraged banks to adopt a ratio higher than the prescribed minimum to promote better liquidity risk management. The guidelines also require banks to increase LCR disclosures, including information on funding concentration by borrowers, products and currencies in annual financial statements starting with the financial year ending March 31, 2015.

Better positioned Moody’s analysed that banks with strong retail deposit franchises and less dependent on short-term funding such as State Bank of India, Axis Bank and HDFC Bank, are in a better position to meet the new requirements.

“Banks with weaker deposit franchises, as represented by smaller levels of low-cost current account and saving account deposits, and a greater reliance on short-term wholesale funding such as YES Bank, will have a harder time meeting requirements,” the Moody’s statement said.

Published on June 16, 2014 16:06