In response to the growing number of mobile and internet banking users, the Reserve Bank of India (RBI) has proposed new, stricter rules for the liquidity coverage ratio (LCR). This move aims to ensure that banks can handle sudden large withdrawals by customers.
The RBI has suggested increasing the run-off factor for retail deposits enabled with internet and mobile banking facilities. The run-off factor is the percentage of deposits that banks must assume will be withdrawn during a stress scenario.
For stable retail deposits with internet and mobile banking, the RBI proposes a run-off factor of 10%. For less stable deposits, this factor will be 15%. These changes mean banks will need to hold more HQLA to cover potential withdrawals.
The regulator also plans to impose an additional run-off factor of 5% on both stable and less stable retail deposits enabled with internet and mobile banking. This adjustment accounts for the increased risk of sudden withdrawals facilitated by digital banking.
The RBI states that the rise in online and mobile banking has made banking transactions much faster. People can now make instant transfers and withdrawals, which increases the risk for banks. To manage these risks, banks need to have more liquid assets ready.
These proposed changes could pressure banks regarding resource mobilization. Banks might need to buy more government bonds or keep more money with the RBI. This could make them more cautious about giving out loans.
Currently, banks must maintain a 100% liquidity coverage ratio. This means the stock of high-quality liquid assets must be at least equal to total net cash outflows. The LCR ensures that banks have sufficient HQLAs to survive an acute stress scenario lasting 30 days.
The draft guidelines state that Level 1 HQLA in the form of government securities should be valued at an amount not greater 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).
At a time when credit growth has consistently been higher than deposit growth, these new norms could further pressure lenders to mobilize resources. The RBI has been encouraging banks to moderate their credit-deposit ratio given the lagging growth of liabilities.
Unsecured wholesale funding provided by non-financial small business customers will be treated similarly to retail deposits under the new norms.
Next Steps
The proposed new norms are scheduled to take effect on April 1, 2025. Feedback on the draft circular from banks and other stakeholders is requested by August 31.
The RBI’s new rules aim to ensure that banks have enough ready money to handle sudden withdrawals, especially with the rise in online and mobile banking. This move is intended to protect customers’ money and ensure the stability of the banking system.
