The Reserve Bank of India’s recent guidelines on liquidity risk management is credit positive for banks, says a report.
The central bank last week issued the final Basel III framework on liquidity standards, which included guidelines on the minimum liquidity coverage ratio (LCR), liquidity risk monitoring tools and LCR disclosure standards.
The RBI said the liquidity coverage ratio (LCR) will be introduced in a phased manner with a requirement of 60 per cent from January 2015.
The requirement would rise in equal steps to reach the minimum required level of 100 per cent on January 1, 2019, it added.
“These guidelines are credit positive for Indian banks,” global rating agency Moody’s said in a report here Monday.
The LCR is designed to address short-term liquidity risk by ensuring that banks hold sufficient cash and other liquid assets to meet obligations in a 30-day market stress scenario.
With this framework, the central bank has encouraged banks to adopt a ratio higher than the prescribed minimum to promote better liquidity risk management.
In its bi-monthly policy on June 3, the RBI had lowered the statutory liquidity ratio (SLR) requirement to 22.5 per cent from 23 per cent.
The guidelines also require banks to increase LCR disclosures, including information on funding concentration by borrowers, products and currencies in annual financial statements starting with the financial year ending March 31, 2015.
“These guidelines will encourage banks to improve asset liability management because of the penalties associated with maturity mismatches, especially in short-term buckets,” Moody’s said.
The requirement creates a credit-positive incentive for banks to focus on growing their retail deposits and reducing reliance on short-term wholesale funding, it added.
According to the report, banks with strong retail deposit franchises and less dependence on short-term funding such as State Bank of India, Axis Bank and HDFC Bank are in a better position to meet the new requirements.
Banks with weaker deposit franchises, as represented by smaller levels of low-cost current account and saving account deposits, and a greater reliance on short-term wholesale funding such as Yes Bank will have a harder time meeting requirements, it added.