Liquidity norms credit-positive for banks: Moody's

To promote better liquidity risk management, RBI has encouraged lenders to adopt a ratio higher than the minimum mandated level

Rating agency Moody’s on Monday said the Reserve Bank of India (RBI)’s decision to mandate liquidity coverage ratio (LCR) from January 1, 2015, was credit-positive for Indian banks.

LCR is defined as the proportion of high-quality liquid assets to the overall net cash outflow in the next 30 calendar days.

RBI has asked lenders to maintain 60 per cent LCR from January 1, 2015, and suggested a phased manner in which the ratio would have to be increased to 100 per cent by January 1, 2019. Till that ratio is achieved, it has urged banks to carry out an equal quantum of increase every year.

“The RBI framework is broadly aligned with that of the Basel committee on banking supervision. To promote better liquidity risk management, the central bank has encouraged lenders to adopt a ratio higher than the minimum mandated level,” Moody’s said in its credit outlook.

It added banks with strong retail deposit franchises and lower dependence on short-term funding, such as State Bank of India, Axis Bank and HDFC Bank, were in a better position to meet the new requirements. “Banks with weaker deposit franchises, as represented by smaller levels of low-cost current account and savings account deposits and greater reliance on short-term wholesale funding, such as YES Bank, will have a harder time meeting the requirements,” Moody’s said.

LCR promotes short-term resilience of banks to potential liquidity disruptions by ensuring sufficient high-quality liquid assets to survive an acute stress scenario for 30 days.

“These guidelines will encourage banks to improve asset liability management because of the penalties associated with maturity mismatches, especially in short-term buckets. The requirement creates a credit-positive incentive for banks to focus on growing their retail deposits and reducing reliance on short-term wholesale funding,” Moody’s said.