SLR And LCR For Banks

New liquidity norms: Bank with excess SLR at an advantage

The LCR norms are to ensure banks have enough short-term liquidity to survive any stress-like scenario arising in the following 30 days

  
Banks having government securities above what is mandated will find it easy to meet the new liquidity coverage ratio (LCR) norms of the Reserve Bank of India (RBI).

Banks are required to invest in government papers at least 22.5 per cent of their net demand and time liabilities, termed the statutory liquidity ratio (SLR). On Monday, the central bank prescribed that banks needed to maintain a 60 per cent LCR from January 1, 2016, to be increased in a phased manner to 100 per cent by January 1, 2019.

Bankers said lenders with a higher SLR and stronger current account and savings account (Casa


) deposits will find it easier to maintain the ratio. Banks with a lower proportion of these low-cost deposits are likely to get impacted on net interest margin, analysts said.

“While SLR is to be kept at 22.5 per cent, most banks have been operating at a higher level of 28-29 per cent. These banks will stand to gain, as they can either liquidate (the excess) or lend to RBI on the repo window and meet the new requirement as the need arises,” said one.

It is due to low credit demand that banks have been parking additional money in SLR. When credit offtake increases, liquidating the additional SLR might not be an option. Therefore, say experts, banks also need to focus on additional things such as growing the Casa base and parking money in more liquid options such as mutual funds.

“Banks that have good Casa ratios will be in a better position to deal with the LCR requirement as the net outflows in near-term buckets can be managed better. Relief (on SLR) overtime will also be helpful in maintaining the LCR. Over time, this will lead to more sensitive asset liability management, as there will be a cost to bunching of liabilities and near-term mismatches,” said Shinjini Kumar, executive director, Pricewate-rhouseCoopers India.

The LCR norms are to ensure banks have enough short-term liquidity to survive any stress-like scenario arising in the following 30 days. Short-term liquidity is defined as the proportion of high-quality liquid assets to the total net cash outflows in the next 30 calendar days.

Apart from a strong Casa, says Shyam Srinivasan, managing director of Federal Bank, banks with a lower exposure to corporate deposits will be relatively less impacted, as volatility on the liquidity front will be less. The new norms will also ensure better liquidity risk management.

A Credit Suisse report says the new norm might impact a few banks negatively. “The guidelines put emphasis on granularity of the funding sources (higher rundown for corporate wholesale deposits) and discourage excessive reliance on short-term funding.” It says banks with weaker liability franchises like YES Bank and IndusInd Bank are at a disadvantage. “If the rules are fully applied from March, this would impact margins by 10-40 basis points and earnings by 5-25 per cent,” the report said.

Link Business Standard

RBI guidelines would constrain growth of banks with weaker
 franchises- Source:MoneyLife

RBI guidelines seeks to limit ability of banks to grow on the back of wholesale funding, which could prove to be a constraining factor for banks from growing aggressively, says Credit Suisse
The Reserve Bank of India (RBI) released guidelines on liquidity risk management under Basel III requirements, with stress on improving short-term balance sheet liquidity. The underlying purpose of the requirement is to ensure that banks have adequate liquidity to meet their needs even under extreme liquidity stress or market disruptions.

 

"The guidelines would constrain banks with weaker franchises from growing aggressively, as they would now need to ramp up liability franchises faster. Banks with relatively weaker franchises like Yes Bank, IndusInd Bank and Union Bank of India may see lower net interest margins (NIMs) and higher opex during the transition," says Credit Suisse in a research report.

 

RBI defined the measure of short-term liquidity – liquidity coverage ratio (LCR) as the ratio of high quality liquidity assets with banks to net cash outflows over the next 30 days.
 

 

The Implementation of these guidelines is being phased out to January 2019, limiting the potential impact during the transition. The guidelines put emphasis on granularity of funding and discourage excessive reliance on short-term funding. This would avoid a build-up of systemic risk by limiting a bank’s ability to grow on volatile wholesale funding.

 

"The guidelines will push banks towards more stable sources of funding and in turn towards lesser wholesale funding and greater granularity in deposits. Banks with weaker liability franchises will have to accelerate their liability franchise build-up. The guidelines will likely avoid build-up of systemic risk by limiting the ability of banks to grow on back of wholesale funding," the report said.

 

RBI has laid down stringent requirements factoring in potential run-down of deposits (5-10%) and claims arising from derivatives exposure under stress scenarios.

 

Credit Suisse said, "This could prove to be a constraining factor for banks from growing aggressively as they would now need to ramp up their liability franchises accordingly. Banks with weaker franchises may see lower NIMs and higher opex during the transition. RBI is further likely to come out with guidelines to address long-term asset liability management (ALM) mismatches (NSFR ratio – net stable funding ratio) under Basel III requirements, adding to the need for accelerated franchise build-ups. HDFC Bank, Axis Bank and ICICI Bank, driven by strong liability franchise and investment done in branch expansion over the past few years, are well placed to accelerate loan growth."

Link Money Life