Banks get 20 pc LCR breather till Oct

Mumbai, Apr 17 () To ensure that the repayment moratorium to help individuals and businesses to tide over the coronavirus-triggered disruptions does not land banks in a liquidity crisis, the RBI on Friday lowered the liquidity coverage ratio (LCR) to 80 per cent from 100 per cent with immediate effect.

The LCR requires banks to hold enough high-quality liquid assets such as short-term government bonds that can be sold to fund a stress scenario. Banks are required to hold LCR which is 100 per cent equivalent of projected cash outflows during the 30-day stress scenario.

Addressing the media via video on Friday, RBI Governor Shaktikanta Das said "to ease the liquidity position at the level of individual institutions, the LCR requirement for commercial banks is being brought down from 100 to 80 percent with immediate effect."

The governor said the LCR requirement will be gradually restored back in two phases -- 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021.

He said the Reserve Bank has been proactively taking measures to address the systemic liquidity issues through a slew of monetary and market operations.

The LCR was introduced as part of the Basel-III reforms following the 2008 global financial crisis and was finalised by the Basel Committee on Banking Supervision in January 2013. The RBI made LCR binding on banks from January 1, 2015 with a transition time where they reached 100 per cent LCR by January 1, 2019.

The LCR is calculated by dividing a bank's high-quality liquid assets by its total net cash flows, over a 30-day stress period. Here, high-quality liquid assets include only those which can be converted easily and quickly into cash.

Commenting on the LCR reduction, ratings agency Icra said the relaxation will enable banks meet the regulatory LCR requirements in case their reliance on bulk deposits or interbank lines increases.

This will help small private banks all the more as they have been witnessing deposit outflows, increasing their reliance on interbank funding. Such interbank funding is included in high run-off while calculating the LCR ratio for banks, the agency added.

R K Gurumurthy, treasury head at Lakshmi Vilas Bank, said the relaxation in the LCR requirement to 80 per cent releases the pressure on banks to divert a larger part of their investments in high quality liquid assets. BEN ABMABM