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Mid-sized banks will now be making a rush to mobilise more retail deposits and increase liquidity to meet the liquidity coverage ratio (LCR) requirement prescribed by the Reserve Bank of India.
The RBI on Monday released the final Basel III framework on liquidity standards which includes guidelines on LCR, liquidity risk monitoring tools, and LCR disclosure standards.
The main objective of LCR is to promote short-term resilience of a bank’s liquidity risk profile by ensuring that it has sufficient high-quality liquid assets to survive a significant stress scenario lasting 30 days.
“Obviously, it (LCR implementation) will be a challenge. All banks will have to structurally increase their liquidity base, both on the asset and liability side.
“In the short term, banks will maximise their SLR (statutory liquidity ratio) in the held-to-maturity portfolio as it is a price protection against higher interest rates,” said a banker with a mid-sized private sector bank.
Weaker deposit franchises Banks with weaker deposit franchises — as represented by smaller levels of low-cost current account and savings account deposits and a greater reliance on short-term wholesale funding — such as IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank and YES Bank will have a hard time meeting requirements, according to rating agency Moody’s Investors Service.
“Banks will have to lower their wholesale deposit base as it will come at a higher price, going forward. This eventually will help banks increase the retail share and thereby reduce their cost of deposits,” said Ramesh Singh, General Manager – Treasury, Central Bank of India, which plans to improve their CASA to 35 per cent from 33 per cent by the year-end.
Moody’s said these guidelines will encourage banks to improve the asset liability management because of the penalties associated with maturity mismatches, especially in short-term buckets.
According to Singh, banks which have more deposits in the less than ₹1 crore category per customer will be in a comfortable position. State Bank of India, Axis Bank and HDFC Bank are among those with a strong retail deposit franchise and are well prepared for such a scenario. The Basel III LCR will be introduced in a phased manner with a requirement of 60 per cent from January 2015.
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