Basel-III: RBI mulls liquidity buffer from SLR portfolio

Last Updated: Mon, Jan 07, 2013 19:46 hrs

Following the Basel committee of banking supervision easing implementation of liquidity coverage ratio, the Reserve Bank of India (RBI) on Monday said Indian banks might be asked to carve out usable liquidity from their existing statutory liquidity portfolio.

Under liquidity coverage ratio, banks are expected to hold a minimum level of highly liquid assets that can be sold in the open market to tide over a liquidity crisis. In normal conditions, these assets must at least be equal to the total net cash flows of the bank on a regular basis.

In India, banks are mandated to keep 23 per cent of their net time and demand liabilities in government securities. However, statutory liquidity ratio (SLR) does not meet the Basel requirement for liquidity coverage ratio as the assets held by banks are not unencumbered and not liquid.

“We already have quite a bit of liquidity ratio requirement (banks in India)... The basic requirement of basic liquidity that has come is that it should be usable under stress. If we look at our SLR, it’s supposed to be maintained continuously,” said Anand Sinha, deputy governor of RBI, at an event.

“Therefore, the question arises whether we add some more liquidity to top of SLR, which will be definitely not good for our banks. So we are looking to carve within the SLR so that part can become usable,” he added.

Said Ashvin Parekh, national leader, global financial services-Ernst and Young: “Globally, banks are allowed more time only for implementation of the liquidity coverage ratio. But in India, we already have several measures to take care of liquidity risks. The liquidity management in India is way different from other countries. There are liquidity chests and SLR to manage liquidity risks. The central bank continuously monitors the liquidity situation very closely.”

The oversight body of the Basel committee, called the Group of Governors and Heads of Supervision, has allowed implementation of the liquidity coverage ratio in a phased manner from January 1, 2015 against a full 100 per cent implementation mooted initially.

Banking experts do not expect RBI to further defer the implementation beyond April 1.

“RBI has already deferred Basel III implementation by a quarter. I don’t think currently there is any dramatic condition in the Indian market, which will prompt RBI to reconsider the implementation of Basel-III norms from April 2013. I believe RBI has worked out a very prudent approach for Basel III implementation,” said Parekh.

On December 28, the central bank delayed the implementation of Basel-III norms in India by three months to April 1.

Some analysts, however, said that if there was a new liquidity norm in India, then banks should get more time.

“Indian banks will be better off with revision in the time table and easing of norms. They get more time for meeting new liquidity norms. Plus, RBI as the national supervisor/regulator gets discretion on what elements can to be included in reserves.

The Basel panel has also reduced the extent of outflows from deposits,” said Vibha Batra, co-head, financial sector ratings, Icra.

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