Informist, Tuesday, Jun 25, 2024

MUMBAI/NEW DELHI – The Reserve Bank of India conducted a special audit of banks to gauge if they held required securities to meet the liquidity coverage ratio. The central bank was worried that some banks may not be able to meet the rules on a day-to-day basis due to their increased credit offtake, according to banking officials aware of the matter.

"They (RBI) are basically checking if the banks are prepared for different stress levels. Let's say if there is X amount of outflows, are banks equipped to manage that," a treasury head at a state-owned bank said. "Banks have asked for some levies from the RBI." The audit was done in a phased manner, with each bank getting scrutinised over the bonds held for LCR computation, the treasury head said.

Liquidity coverage ratio is the amount of highly liquid assets held by financial institutions, in this case banks, to ensure their ongoing ability to meet short-term obligations. In India, banks are required to hold enough stock that can be liquidated at minimal loss to meet 100% of a hypothetical 30-day stress scenario in which outflows can occur. These bond holdings need to comprise highly liquid government bonds above the statutory liquidity ratio requirement of 18%, as well as cash in excess of the cash reserve ratio, and funds parked with the RBI under the standing deposit facility.

"The nature of a retail deposit is different from institutional ones, retail tends to be more sticky. It needs to be accounted correctly in the LCR," a senior treasury official at a private bank said. "The RBI wanted to ensure that banks were not using dodgy assets, or not classifying their deposits as more stable, when reporting them."

Meanwhile, banks have told the RBI that intraday LCR norms maintenance can be bothersome for the lenders. Credit growth has outpaced deposit growth in 2023-24 (Apr-Mar), though in some cases the absolute increase in deposits remains above credit growth. While meeting the regulatory requirement on a 30-day rolling basis, banks must raise excess cash from the market to sometimes meet the LCR on a per-day basis, officials said. However, there have been no updates on this front from the RBI, the people said.

Moreover, other than ensuring that banks are prepared for any urgent retail outflows through the digital mode, the central bank is likely to keep an eye on some banks' credit to deposit ratio, and their ability to maintain LCR as their liabilities and potential outflows increase. In particular, HDFC Bank has more loans than deposits on its balance sheet, after absorbing the non-bank financial company Housing Development Finance Co in July last year. In the quarter ended March, its total loans were 25.08 trln rupees while deposits were 23.80 trln rupees.

"For most PSUs, it was almost routine. There is no risk for us because our credit-deposit ratios are relatively lower," a senior treasury official at another state-owned bank said. "I think this audit was conducted to make it clear to certain private-sector lenders that they need to tighten up their reporting." End

Reported by Nishat Anjum and Aaryan Khanna

Edited by Deepshikha Bhardwaj

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