RBI’s New Rules for Banks: Changes in Liquidity Standards
The Reserve Bank of India (RBI) has issued a draft circular on the Basel III framework regarding liquidity standards. This was announced in the April monetary policy. The RBI is inviting comments from banks and stakeholders on the draft by August 31, 2024.
Key Points of the Draft Circular
Banks under the Liquidity Coverage Ratio (LCR) framework must maintain a stock of high-quality liquid assets (HQLA) to cover expected net cash outflows over the next 30 days. The RBI has reviewed the LCR framework and decided that banks should assign an additional five percent run-off factor for retail deposits enabled with internet and mobile banking facilities (IMB). This means:
- Stable retail deposits with IMB will have a 10 percent run-off factor.
- Less stable deposits with IMB will have a 15 percent run-off factor.
According to the RBI, banking has rapidly transformed with increased technology usage, which has facilitated instant bank transfers and withdrawals but also increased risks. Therefore, proactive management is required.
Other Proposals
The draft circular also states that unsecured wholesale funding from non-financial small business customers should be treated like retail deposits. 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 Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) requirements.
Recent incidents have shown that depositors can quickly withdraw or transfer deposits during times of stress using digital banking channels. This has led to the RBI proposing modifications to the LCR framework to better manage liquidity risk by banks. Additionally, deposits previously excluded from LCR computation, such as non-callable fixed deposits, will be treated as callable if pledged as collateral for a credit facility or loan.
Applicability
The draft circular applies to all commercial banks, excluding payment banks, regional rural banks, and local area banks. The new rules are proposed to take effect from April 1, 2025.
Doubts Revealed
RBI -: RBI stands for the Reserve Bank of India. It is the central bank of India, which means it controls the money supply and interest rates in the country.
Basel III framework -: The Basel III framework is a set of international banking regulations developed by the Basel Committee on Banking Supervision. It aims to strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and leverage.
liquidity standards -: Liquidity standards are rules that ensure banks have enough liquid assets, like cash or easily sellable assets, to meet their short-term obligations.
high-quality liquid assets -: High-quality liquid assets are assets that can be quickly converted into cash without losing much value. Examples include government bonds and cash.
net cash outflows -: Net cash outflows refer to the amount of money a bank expects to pay out over a certain period, minus the money it expects to receive.
run-off factor -: A run-off factor is a percentage used to estimate how much of a bank’s deposits might be withdrawn over a certain period.
retail deposits -: Retail deposits are the money that regular people, like you and your family, keep in their bank accounts.
internet and mobile banking -: Internet and mobile banking allow people to manage their bank accounts and perform transactions using the internet or a mobile app.
draft circular -: A draft circular is a preliminary version of a document that outlines new rules or guidelines. It is shared to get feedback before the final version is released.
comments on the draft -: Comments on the draft are suggestions or feedback from the public or experts about the proposed rules before they are finalized.
