RBI's New LCR Guidelines Overview

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Questions and Answers

What is the proposed additional run-off factor for retail deposits as per the new guidelines?

12%

10%

5% (correct)

15%

What factor may contribute to increased pressure on lenders regarding resource mobilisation?

Increased loan defaults

Declining interest rates

Rising credit growth (correct)

Higher deposit growth

When are the proposed new liquidity coverage ratio norms expected to come into effect?

March 1

June 1

May 1

April 1 (correct)

What has the RBI been nudging banks to do in light of the current situation?

Moderate their credit-deposit ratio Signup and view all the answers

What method of banking has contributed to rising demands for more stringent liquidity norms?

Mobile and internet banking Signup and view all the answers

What is a likely consequence of implementing the stricter liquidity norms for banks?

Strain on resource mobilisation Signup and view all the answers

What is the liquidity coverage ratio (LCR) related to?

Banks' ability to handle liquidity demands Signup and view all the answers

What is the run-off factor for stable retail deposits as stated by the RBI?

15% Signup and view all the answers

What is the run-off factor for less stable deposits according to the guidelines?

15% Signup and view all the answers

What do banks need to have to meet the Liquidity Coverage Ratio (LCR) requirements?

High-Quality Liquid Assets Signup and view all the answers

What is the main purpose of the LCR as stated in the guidelines?

To ensure short-term resilience to liquidity disruptions Signup and view all the answers

By when are comments on the draft circular invited from stakeholders?

August 31 Signup and view all the answers

What impact will the proposed changes have on banks' liquidity coverage ratios?

They will be adversely impacted Signup and view all the answers

Deposits from which type of entities are expected to have a higher run-off factor?

Non-financial corporates Signup and view all the answers

What additional run-off factor is imposed on retail deposits in the draft norms?

5 per cent Signup and view all the answers

What type of assets should be valued at their current market value under the new guidelines?

High-quality liquid assets Signup and view all the answers

What is the current liquidity coverage ratio that banks are mandated to maintain?

100 per cent Signup and view all the answers

Which facility's margin requirements are relevant for high-quality liquid assets under the new guidelines?

Liquidity Adjustment Facility Signup and view all the answers

What type of deposits does the term 'stable retail deposits' refer to according to the draft norms?

Deposits enabled with internet and mobile banking facilities Signup and view all the answers

What action are banks likely to take in anticipation of the implementation of the new guidelines?

Build up government securities Signup and view all the answers

Study Notes

RBI's Proposed Liquidity Coverage Ratio (LCR) Changes

RBI aims to tighten LCR norms by proposing a higher run-off factor for retail deposits amid rapid growth in mobile and internet banking users.
New guidelines suggest a 5% additional run-off factor for stable and less stable retail deposits enabled by internet and mobile banking.
Stable retail deposits will carry a 10% run-off factor, while less stable deposits will have a 15% run-off factor.
The new regulations are set to be enforced from April 1, 2025, with feedback from banks and stakeholders required by August 31, 2024.

Impact on Bank Liquidity and Operations

Increased run-off factors could intensify pressure on banks to mobilize resources as credit growth currently exceeds deposit growth.
RBI has been encouraging banks to manage their credit-to-deposit ratio to address the disparity in deposit liabilities.
Run-offs denote unanticipated withdrawals by individuals or businesses, and current regulations mandate a 100% liquidity coverage ratio.

High-Quality Liquid Assets (HQLA) Considerations

Banks are expected to hold sufficient HQLAs to withstand potential liquidity disruptions over a 30-day stress scenario.
Current guidelines dictate that Level 1 HQLAs, primarily consisting of government securities, must be valued no higher than their market value, adjusted for haircuts based on margin requirements.
Proposed changes are seen as a positive step for strengthening banks' liquidity positions and ensuring compliance with regulatory frameworks.

Shift in Bank Strategies

To comply with the upcoming LCR norms, banks are likely to increase their holdings of government securities ahead of the new requirements.
Firms will need to adjust their asset strategies to satisfy both the liquidity goals and the need for higher liquid asset buffers amid tightening regulations.

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Description

This quiz explores the Reserve Bank of India's recent proposals to tighten the Liquidity Coverage Ratio (LCR) norms for banks. Key changes include an additional 5% run-off factor on retail deposits, aimed at ensuring better deposit security amidst higher credit growth. Test your knowledge on these new guidelines and their implications for the banking system.