RBI News: Banks Must Hold More Liquid Assets as Internet Banking Risks Grow, Says ICRA Ltd

The Reserve Bank of India (RBI) released draft guidelines on Thursday, asking banks to keep more liquid securities as a safety measure due to the growing use of technology for transferring funds. These guidelines, which will start in the financial year 2025, aim to prevent situations like the collapse of Silicon Valley Bank.

Focus on Liquidity Coverage Ratio (LCR)

The guidelines focus on the Liquidity Coverage Ratio (LCR), which is the amount of high-quality liquid assets (HQLA) such as government securities that banks must hold to manage a 30-day period of financial stress.

Increased Risks Due to Technology

The RBI noted that while technology has made it easier to transfer and withdraw money instantly, it also increases risks that need careful management. To address this, the RBI has proposed that banks apply an extra 5% run-off factor for retail deposits that use internet and mobile banking (IMB). Stable retail deposits with IMB would have a 10% run-off factor, and less stable deposits with IMB would have a 15% run-off factor.

New Run-Off Factors for Retail Deposits

Previously, the guidelines suggested a 5% run-off factor for stable deposits and 10% for less stable deposits. The new draft introduces a specific category for retail deposits with IMB.

Treatment of Unsecured Wholesale Funding

The central bank also stated that unsecured wholesale funding from small business customers should be treated the same as retail deposits. Currently, banks are maintaining an LCR of 130%, above the RBI’s requirement of 100%. This means banks must hold liquid assets equal to the expected outflow in the next 30 days.

Impact on Banks

Anil Gupta, Vice President and Co-Group Head of Financial Sector Ratings at ICRA Ltd, explained that the new guidelines could cause a 10% to 15% decrease in the reported LCR. A 10% decline might require banks to add about 4 lakh crore rupees in additional HQLAs. Gupta noted that the widespread use of internet and mobile banking would increase outflows in the next 30-day period, leading to higher requirements for liquid assets.

Haircuts on Government Securities

Furthermore, the proposed guidelines suggest applying haircuts on government securities for inclusion in HQLAs, which would reduce the value of existing HQLAs for LCR calculation. Overall, this would require banks to hold more government securities to meet the new LCR standards, potentially impacting their LCRs negatively.