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The Reserve Bank of India (RBI) has told banks that overnight balances held by them under the standing deposit facility (SDF) will be eligible as ‘Level 1 High Quality Liquid Assets (HQLA)’ for computation of the Liquidity Coverage Ratio (LCR).
This will enhance the ability of banks to achieve LCR. This ratio promotes short-term resilience of banks to potential liquidity disruptions by ensuring that they have sufficient HQLAs to survive an acute stress scenario lasting for 30 days.
SDF allows RBI to absorb liquidity without any collateral. RBI currently pays banks 5.65 per cent interest for deploying surplus liquidity.
Banks are required maintaining a minimum LCR of 100 per cent (that is the stock of HQLA should at least equal total net cash outflows) on an ongoing basis because the stock of unencumbered HQLA is intended to serve as a defence against the potential onset of liquidity stress.
As per the Basel III Framework on Liquidity Standards, banks should strive to achieve a higher ratio than the minimum prescribed as an effort towards better liquidity risk management.
HQLAs include cash, including cash reserves in excess of required cash reserve ratio; Government securities in excess of the minimum Statutory Liquidity Ratio (SLR) requirement; within the mandatory SLR requirement, Government securities to the extent allowed by RBI under Marginal Standing Facility (MSF); and marketable securities issued or guaranteed by foreign sovereigns satisfying certain conditions, among others.
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