RBI Engages with Banks on New Liquidity Regulations Amid Credit Flow Concerns
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Synopsis
The Reserve Bank of India is consulting with banks regarding the implications of its new liquidity coverage norms, which may hinder the credit flow in the economy. Feedback from banks includes requests for deferment and alternative strategies.
Key Takeaways
- The RBI is consulting banks about liquidity coverage norms.
- Concerns about credit flow impacts have been raised.
- New RBI Governor Sanjay Malhotra is in charge.
- Liquidity conditions are tight with a deficit over Rs 3 lakh crore.
- Additional funds are required for retail deposits linked to IMB.
Mumbai, Jan 24 (NationPress) The Reserve Bank of India (RBI) has initiated discussions with banks this week to gauge the repercussions of its newly introduced liquidity coverage requirements, amid worries that these changes might negatively affect the credit flow in the economy.
According to an NDTV Profit report, banks have shared their feedback, seeking a postponement of the regulations and alternative solutions to manage the anticipated impacts.
This engagement comes at a moment when Sanjay Malhotra has recently assumed the position of the new Governor of the RBI, following Shaktikanta Das, who concluded an extended tenure in December.
Liquidity conditions have already tightened, with the banking system facing a deficit exceeding Rs 3 lakh crore as of Thursday, despite the daily variable repo rate auctions that the RBI commenced last week.
On July 25, the RBI released a draft circular mandating banks to reserve additional funds to mitigate their risks starting from April 1 this year.
The RBI noted that banking has experienced rapid changes in recent times. While the increased use of technology has enhanced the ability to execute instantaneous transactions and withdrawals, it has simultaneously led to a rise in risks, necessitating proactive management. The Liquidity Coverage Ratio (LCR) framework has been reviewed to bolster the resilience of banks.
Banks are required to allocate an extra 5 percent in funds for retail deposits linked to Internet and Mobile Banking (IMB). Retail deposits classified as stable will have a 10 percent run-off factor, while less stable deposits will face a 15 percent run-off factor.
The LCR stipulates that banks maintain adequate high-quality liquid assets (HQLAs), primarily composed of government securities, to navigate potential liquidity challenges resulting from sudden fund withdrawals. The RBI has declined banks' requests to factor in their existing cash reserve ratios when calculating HQLAs.
According to bank treasury officials, this could effectively mean that over Rs 4 lakh crore would need to be redirected from banks to purchase government bonds, rather than being available for lending to corporates and individuals in the economy.
Banks have also communicated with the finance ministry regarding the necessity to relax the stringent RBI guidelines, which could adversely affect credit growth.
