Banks to Make Representations to RBI on Depositor Behavior Amid Tighter LCR Norms
Mumbai Banks to Make Representations to RBI on Depositor Behavior Amid Tighter Liquidity Norms
MUMBAI: In response to the Reserve Bank of India’s recent proposal for tighter liquidity coverage ratio (LCR) norms, banks in Mumbai are gearing up to make representations to the central bank regarding certain aspects of depositor behavior. The goal is to address the regulator’s concerns about potential mass withdrawals reminiscent of Silicon Valley-style scenarios.
The RBI has set a deadline until the end of August for feedback on the new LCR norms. One key area that banks plan to focus on is the behavioral analysis of different types of deposits. According to a banking industry insider, there is a belief that term deposits linked to internet banking have a lower propensity for abrupt fund withdrawals.
Additionally, concerns have been raised about the proposed 100% increase in run-off factors for stable, insured deposits compared to the 50% increase for less stable deposits. Banks are looking to provide feedback on this aspect to ensure a fair and balanced approach.
Under the new norms, banks are required to maintain 100% LCR, primarily consisting of high-quality liquid assets such as government securities. The increased requirement for banks to hold more funds in these assets aims to ensure liquidity in times of stress, especially when faced with rapid withdrawals or transfers due to internet and mobile banking facilities.
The RBI’s draft guidelines on LCR highlighted the risks associated with the increased use of technology in banking. The central bank specified that retail deposits enabled with internet and mobile banking will have additional run-off factors, with stable deposits having a 10% factor and less stable deposits having a 15% factor.
Analysts estimate that the proposed norms could lead to a reduction in LCR maintenance levels by banks, resulting in a higher demand for short-term government securities. This could pose a challenge for banks, especially in an environment where credit growth outpaces deposit growth.
As of July 12, 2024, bank credit growth stood at 15.5% year on year, while deposit growth was at 11.7% over the same period, according to the latest RBI data.
Overall, banks in Mumbai are preparing to engage with the RBI to address concerns and ensure a smooth transition to the new LCR norms. The industry is focused on maintaining stability and liquidity while adapting to the evolving landscape of banking technology.
