Banks Seek RBI Flexibility Amid 24x7 Banking Era

Indian banks have appealed to the Reserve Bank of India (RBI) for more flexibility in maintaining a crucial reserve requirement, aiming to adapt to the challenges posed by round-the-clock banking transactions. This move comes in light of recent events that disrupted US regional banks due to sudden deposit outflows.

Lenders are urging the RBI to allow the compulsory portion of funds reserved for the Cash Reserve Ratio (CRR) to qualify as High-Quality Liquid Assets (HQLA) for calculating the Liquidity Coverage Ratio (LCR), according to sources familiar with the matter.

Granting this request would provide banks with leeway to meet potential increases in LCR requirements triggered by shifts in the RBI’s deposit classifications.

The RBI’s proposed modifications to the LCR framework aim to enhance liquidity risk management in banks, particularly following instances of rapid deposit withdrawals observed globally. Notably, the US-based Silicon Valley Bank faced such challenges last year.

Sources also indicate the RBI’s scrutiny of insured and uninsured deposits and transaction limits under instant banking channels.

Changes in how stable and less stable retail deposit buckets are assessed for LCR, specifically the outflow factor, are anticipated. The outflow factor, currently at 5% for insured deposits and 10% for uninsured, may be raised, necessitating banks to allocate more funds towards purchasing HQLA to meet heightened LCR standards.

With robust loan demand and the need to safeguard against sudden outflows through instant banking, banks must navigate increased LCR requirements judiciously.

The RBI’s measures align with global banking norms introduced post the 2007-08 financial crisis. Notably, the NEFT and RTGS systems have experienced exponential growth in transaction volume and value, reflecting the evolution towards continuous, real-time banking operations.

These developments underscore the ongoing evolution of India’s banking landscape, emphasizing the need for adaptive measures to ensure robust liquidity management amid dynamic market conditions.