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The Reserve Bank of India (RBI) has introduced draft guidelines aimed at strengthening the liquidity resilience of banks, addressing risks associated with the growing use of technology in banking. Released on Thursday, the draft circular underscores how technological advancements, while enhancing the convenience of instantaneous transactions, also introduce new risks that require careful management.
The guidelines propose a 5% additional runoff factor on retail deposits accessible through internet and mobile banking platforms. This measure is designed to counteract the potential for “runoff,” where depositors might withdraw funds to invest in higher-yield opportunities, thus reducing the bank’s available capital. By increasing the runoff factor, the RBI seeks to ensure that banks are better prepared to manage sudden withdrawals.
The guidelines propose stricter LCR requirements, compelling banks to hold a sufficient buffer of high-quality liquid assets (HQLA) to cover their total net cash outflows over a 30-day stress period. This aims to ensure that banks can meet short-term liquidity demands without resorting to emergency measures.
The draft also includes provisions for the NSFR, which mandates that banks maintain a stable funding profile relative to their on- and off-balance sheet activities. This ratio is designed to promote resilience over a longer-term horizon by ensuring that banks have a diversified and stable funding base.
The RBI recommends that banks establish comprehensive CFPs that outline strategies for addressing potential liquidity shortfalls. These plans should include a range of actions, from drawing on committed lines of credit to utilizing central bank facilities, to maintain liquidity during times of stress.
The Reserve Bank of India’s draft guidelines to strengthen banks’ liquidity resilience mark a significant step towards enhancing the stability and robustness of the country’s financial system. By implementing these measures, the RBI aims to ensure that Indian banks are well-equipped to navigate periods of financial stress, protect the interests of stakeholders, and maintain confidence in the banking sector.