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RBI issues guidelines on liquidity management

Source : BUSINESS_STANDARD
Last Updated: Wed, Nov 07, 2012 21:44 hrs
Reserve Bank of India (RBI) Governor Duvvuri Subbarao attends the monetary policy review meeting in Mumbai

The Reserve Bank of India (RBI) on Tuesday said banks should fix a lower limit for their IBL (inter-bank liability).

"The IBL of a bank should not exceed 200 per cent of its net worth as on March 31 of the previous year. However, individual banks may, with the approval of their board of directors, fix a lower limit for their inter-bank liabilities, keeping in view their business model," RBI said in its final guidelines on liquidity risk management.

According to experts, this would result in banks reworking their exposure limits.

RBI also said banks whose capital to risk-weighted assets ratio (CRAR) was at least 11.25 per cent (25 per cent more than the minimum CRAR of nine per cent) as on March 31 of the previous year, can have a higher limit of up to 300 per cent of net worth for IBL.

Besides, RBI allowed the limit on the call money borrowings as prescribed by the central bank for call/notice money market operations to operate as a sub-limit within the above IBL limits.

At present, on a fortnightly average basis, such borrowings should not exceed 100 per cent of bank's capital funds. However, banks are allowed to borrow a maximum of 125 per cent of their capital funds on any day, during a fortnight.

The finance ministry had earlier asked public sector banks to reduce their dependence on high cost volatile bulk deposits. RBI said banks still having a high concentration of wholesale deposits are expected to frame suitable policies to contain the liquidity risk arising out of excessive dependence on such deposits. Wholesale deposits for this purpose would be Rs 15 lakh or any such higher threshold as approved by the banks' board.

RBI has also tightened the reporting frequency of furnishing statement of structural liquidity.

RBI also told banks to focus on the outcome of stress tests to identify and quantify sources of potential liquidity strain and to analyse possible impacts on the bank's cash flows, liquidity position, profitability and solvency. According to RBI, the results of stress tests should be discussed thoroughly by the Asset-Liability Committee. "Remedial or mitigating actions should be identified and taken to limit the bank's exposures, to build up a liquidity cushion and to adjust the liquidity profile to fit the risk tolerance," RBI said.

Banks have also been asked to formulate a contingency funding plan (CFP) to respond to severe disruptions which might affect the bank's ability to fund some or all of its activities in a timely manner and at a reasonable cost. "CFPs should prepare the bank to manage a range of scenarios of severe liquidity stress that include both bank-specific and market-wide stress and should be commensurate with a bank's complexity, risk profile, scope of operations," RBI said.




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