LCR altered banks’ activity in call money market: RBI

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Published: August 31, 2017 3:31:43 AM

The Reserve Bank of India (RBI) said in its annual report that introduction of the liquidity coverage ratio (LCR) has altered banks’ activity in the call money market in the post-LCR regime.

RBI, LCR, banks, bankingThe Reserve Bank of India (RBI) said in its annual report that introduction of the liquidity coverage ratio (LCR) has altered banks’ activity in the call money market in the post-LCR regime.(Image: Reuters)

The Reserve Bank of India (RBI) said in its annual report that introduction of the liquidity coverage ratio (LCR) has altered banks’ activity in the call money market in the post-LCR regime.  However, it is understood that banks have been borrowing from the call money market to meet their LCR requirements. This did not cause much disruption when the LCR was at 60%. However, as it increased to 70% and then 80% by 2017, banks are finding it harder to meet their LCR requirement using the call money market.  This is because any amount borrowed under the call money route will automatically be calculated under the total net cash outflows over the next 30 days (the denominator in the ratio). As a result, the greater the LCR requirement, the harder it is for banks to use inter-bank funds to manage LCR requirement on a daily basis.

“Banks should look towards longer tenure deposits or other instruments such as certificates of deposits to fund their LCR requirement. Simply depending on the call money market is not going to help,” said the executive director of a private bank. The LCR was introduced in January 2015 — in line with the Basel III framework — wherein banks had to maintain high quality liquid assets (HQLA) which could be converted into cash to meet its liquidity needs for 30 calendar days. In short, LCR is the ratio of high quality liquid assets (HQLAs) maintained by the bank in the form of government securities, etc to the total net cash outflows over the next  30 days.

When the LCR was introduced in 2015, banks had to maintain the LCR at 60%. LCR increases 10% every year till it reaches 100% in 2019. As of now, it stands at 80%. The central bank did its part to ease the load on banks. In order to ensure the smooth implementation, the RBI allowed a carve out of 11% of statutory liquidity ratio (SLR). The RBI also reduced SLR to provide flexibility to banks to meet the LCR norms by January 2019 when banks have to reach the minimum LCR of 100%. The RBI stated in its annual report that a study will be undertaken to assess as to whether the introduction of the LCR has impacted monetary transmission.

The regulator also feels that the poor health of the banking sector appears to have impacted monetary transmission as banks have either not responded adequately to cuts in the policy rate or did not cut their lending rates.  The RBI has also said it will use multiple instruments to manage the excessive liquidity in the system. “As surplus liquidity is expected to pose a challenge, especially in the first half of 2017- 18, the Reserve Bank will endeavour to manage liquidity using multiple instruments available at its disposal. However, the use of any particular instrument will be situation-specific with the sole objective of ensuring closer alignment of the operating target to the policy repo rate,” the RBI said.

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