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Informist, Monday, Dec. 30, 2024

 

--RBI report: Banking system LCR at 128.5% as at Sept-end vs 135.7% year ago

 

NEW DELHI – The banking system's liquidity coverage ratio fell to 128.5% as of September-end, against 135.7% a year ago, the Reserve Bank of India said in its Financial Stability Report for December. In the most severe stress test case, the RBI's model shows that the ratio could fall to as low as 114.8%, the report said. 

 

Liquidity coverage ratio refers to a bank's high-quality liquid assets, such as government bonds, as a percentage of its net expected cash outflows in the next 30 days. The regulatory minimum is 100%. The RBI said no entities in its sample of 46 major banks would fail to meet that mark in its Stress Scenario 1, when run-off factors on its cash outflow components were raised by up to 100%.

 

However, under the most stressful Stress Scenario 2, when run-off factors were increased by up to 140% of the baseline, two banks would fail to meet the regulatory minimum, the report said. The worst-performing bank's liquidity coverage ratio would fall to 95.8%.

 

As per the base case, banks' liquidity coverage ratio will remain 128.0%, little changed from the levels at September-end. In the intermediate stress test, banks' liquidity cover shrunk to 120.9% of their expected outflows. Under the latter, the stress test showed the worst-performing bank would fall to a liquidity coverage ratio of 102.5%. 

 

"The impact of liquidity stress on public sector banks is the highest (decline of 14.5 percentage points under stress scenario 2) among bank groups," the RBI said. "Foreign banks have the highest LCR among bank groups under all the three scenarios."

 

The liquidity coverage ratio of banks has been under scrutiny amid the central bank's intent to introduce new norms that strengthen the guardrails of this regulation. The RBI, in July, released draft guidelines on the Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio, which proposed that banks should assign an additional 5% run-off factor on internet and mobile banking-enabled retail deposits. It also proposed tighter norms on the valuation of high-quality liquid assets and to bring other sources of liabilities of banks under the liquidity coverage ratio framework.

 

The run-off factors in the stress tests on stable and less stable retail deposits were lower than the draft norms, though the latter would only apply on a subset of deposits that are internet and banking-linked. The other run-off factors were set at much higher levels than the draft norms had proposed. Ratings agency ICRA had projected a fall of 14-17 percentage points in the banking system's liquidity coverage ratio under the proposed guidelines, while in Stress Scenario 2, the RBI's test showed a hit of 14 percentage points.   End

 

Reported by Aaryan Khanna

Edited by Akul Nishant Akhoury

 

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