The Reserve Bank of India (RBI) has issued draft guidelines for banks, mandating them to maintain a higher stock of liquid securities as a buffer against potential threats from unexpected depositor withdrawals. This move comes in response to the increasing ease of withdrawals facilitated by technology, such as mobile and internet banking. The new norms are set to come into effect on April 1, 2025.
In a statement, the RBI noted the rapid transformation in banking due to technological advancements. The central bank highlighted that while technology has made bank transfers and withdrawals instantaneous, it has also increased risks, necessitating proactive management. The revised Liquidity Coverage Ratio (LCR) framework is intended to enhance the liquidity resilience of banks.
Under the new guidelines, banks are required to assign an additional 5 percent run-off factor for retail deposits that are enabled with internet and mobile banking (IMB) facilities. Consequently, stable retail deposits with IMB will have a 10 percent run-off factor, while less stable deposits will face a 15 percent run-off factor. This essentially means that banks must be cautious with deposits that are easily accessible through technology, as they can be quickly withdrawn.
Additionally, the RBI has stipulated that unsecured wholesale funding from non-financial small business customers should be treated similarly to retail deposits. This new directive is seen as an effort by the RBI to mitigate the potential risk of a sudden outflow of deposits, which could destabilize banks.
The RBI’s decision comes at a time when banks are already facing challenges in raising deposits, exacerbated by a high credit-deposit ratio. The gap between the rapid growth of credit and slower deposit growth has put additional pressure on banks. The new LCR rules are expected to further strain banks, already grappling with a deposit crisis.
While the RBI has been a proponent of embracing technology in banking, it now acknowledges the potential risks associated with it. The central bank’s latest guidelines aim to ensure that banks are better equipped to handle sudden liquidity shocks, thereby safeguarding the stability of the banking system.
