FREE

Event update: Financials - RBI relaxes LCR

Event: RBI has provided some liquidity relief to banks by tweaking LCR norms. As background, the liquidity coverage ratio (LCR) refers to highly liquid assets (held by financial institutions to meet short-term obligations. With effect from October 1, the carve out of SLR allowed for the purpose of computing LCR has been increased by 2% of NDTL from 13% to 15%.

Impact: This will free up funds for banks as they will need to buy lesser amount of new g-secs to meet LCR. The notional liquidity release of 2% of NDTL will amount to Rs2.4 trillion. This amount can be used for lending. This measure is akin to an SLR cut. Due to slower deposit growth and RBI’s forex intervention, systemic liquidity as measured by net repo has been negative. While the LCR relaxation measure is positive on liquidity; it is negative for yields on the margin.

RBI has been taking steps to improve systemic liquidity which has been in deficit, through OMOs and this measure.

This measure does not indicate automatic relief for NBFCs: While this will provide more liquidity to banks to lend more, it does not mean an automatic ease of liquidity for NBFCs. We reiterate that the current funding crunch of NBFCs is also about lack of confidence of lenders / investors, not only about tight liquidity position of banks.

Detailed RBI guideline: The assets allowed as the Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing the LCR of banks, include (a) Government securities in excess of the minimum SLR requirement and, (b) within the mandatory SLR requirement, (i) Government securities to the extent allowed by RBI under Marginal Standing Facility (MSF) [presently 2 per cent of the bank's NDTL] and (ii) under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) [presently 11 per cent of the bank's NDTL].

It has been decided to permit banks with effect from October 1, 2018, to reckon Government securities held by them up to another 2 per cent of their NDTL, under FALLCR within the mandatory SLR requirement, as Level 1 HQLA for the purpose of computing their LCR. Hence, the carve-out from SLR, under FALLCR will now be 13 per cent, taking the total carve out from SLR available to banks to 15 per cent of their NDTL.