Banks prepare for higher outflow rates on retail deposits ahead of revised liquidity coverage ratio rules
outflow rates on retail deposits in preparation for the upcoming revisions to the liquidity coverage ratio (LCR) rules, which require them to purchase more high-quality liquid assets. The banking regulator is set to issue revised LCR rules to mitigate the risk emanating from mass withdrawals of deposits-an event that triggered the collapse of Silicon Valley Bank in the US.
Although the Reserve Bank of India has not yet issued the final guidelines for the revised LCR regulations, banks said that they are likely to be effective April 1 next year.
Axis Bank, which declared its second-quarter results last week, said its average LCR has fallen because it applied a higher outflow rate than that prescribed by the RBI. Its LCR was 115%, down 5 percentage points over the June quarter.
For HDFC Bank, the LCR rose in the second quarter to 128% from 123% in June. Supported by strong deposit growth and a slower increase in advances, HDFC Bank chose to increase the liquid assets and LCR ratio to absorb the expected adverse impact of the upcoming change to the regulations.
The proposed rules direct banks to deploy more funds in high-quality liquid assets to prepare them for a mass withdrawal by depositors. These assets, mostly government securities, could be quickly liquidated in a hypothetical stress episode where lenders offering internet and mobile banking facilities face quick fund withdrawals or transfers. In its draft rules, the RBI said while increased use of technology facilitated instantaneous bank transfers and
