RBI allows banks to maintain lower liquidity ratio

Reserve Bank of India has provided some benefits to banks like maintaining lower liquidity coverage ratio, but at the same time has asked them to raise provisions against accounts which are showing stress.

The central bank has reduced the liquidity coverage ratio (LCR) requirement for banks to 80 per cent from 100 per cent with immediate effect as a relief to these lenders.

This means, banks should have a stock of high-quality liquid assets (HQLA) — such as short-term government debt — which is 80 per cent of their total net cash outflows for 30 days. RBI stipulates banks to maintain LCR so that they can be sell the assets in stressed times.

The decision is aimed at easing the liquidity woes at institutions level while the regulator has also taken steps to address the systemic liquidity concerns.

“The RBI has shown pragmatism while announcing the second round of measures, aimed at maintaining liquidity and incentivizing credit flows,” said Jaspal Bindra, executive chairman at Centrum Group.

The LCR requirement will gradually be restored back in two phases – 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021, RBI said.

“At the same time, we are cognizant of the risk build-up in banks’ balance sheets on account of firm-level stress and delays in recoveries,” the regulator said.

To address this concern, RBI told banks to maintain higher provision of 10 per cent on all such accounts under the standstill. The provisions can be spread over two quarters — in March quarter and June quarter.

RBI has done this “with the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges.”

These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts.

Source Article

Lois C. Ferrara

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