Mumbai: In a move that will make it easier for smaller banks to comply with Reserve Bank of India’s (RBI’s) prudential norms, the central bank has allowed lenders to recognise deposits of up to Rs 7.5 crore by small businesses for purpose of maintaining liquidity coverage ratio (LCR). The earlier threshold for a deposit being part of the LCR was Rs 5 crore.
“While the circular intends to align the definition of small business customer across different circulars, it will also have a collateral impact of improving LCR for banks,” said an analyst. The LCR requirement was introduced as part of post-Global Financial Crisis (GFC) reforms by the Basel Committee on Banking Supervision (BCBS) — the international association of banking regulators. The idea behind this is that a bank should at all times have liquid assets to meet 30 days’ net outgo under stressed conditions.
The LCR is measured by dividing the value of high-quality liquid assets (including government bonds) that a bank holds by the expected outgo in 30 days. While measuring outflows, small business deposits are considered as sticky deposits with lower run-off. When the ticket size of small deposits is increased from Rs 5 crore to Rs 7.5 crore, it means that the quantum of hot money that can go out will decrease and thus improve the bank’s LCR.
The revision in LCR norms comes at a time when the RBI is normalising some of the liquidity that it has created for banks to tide over the pandemic. Corporate deposits are considered as hot money and not stable deposits as they are parked for business use. Smaller deposits are considered stable as they also form part of savings. “With the objective to better align our guidelines with the BCBS standard and enable banks to manage liquidity risk more effectively, it has been decided to increase the threshold limit for deposits and other extensions of funds made by non-financial small business customers,” the RBI said in a circular.