News Analysis

Liquidity tweak has potential to release ₹2.6-lakh crore over next four quarters

Radhika Merwin BL Research Bureau | Updated on April 04, 2019 Published on April 04, 2019

But the actual amount released will depend on a number of factors

In a bid to ease up liquidity in the banking system, the RBI brought in liquidity measures that have the potential to release about ₹2.6-lakh crore into the system in a staggered manner.

The RBI increased the Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) from the existing 13 per cent to 15 per cent of banks’ net demand and time liabilities (NDTL). The increase will happen in a phased manner, starting with FALLCR at 13.5 per cent of NDTL in April, subsequently increasing by 0.5 per cent every quarter until FALLCR reaches 15 per cent by April 1, 2020.

This essentially implies that banks will be able to dip into government bonds held under SLR to the extent of 17 per cent of NDTL by April next year. This should ease up liquidity pressure in the banking system to some extent.

What is it?

Banks maintain a portion of their deposits (NDTL) as statutory liquidity ratio (SLR) in the form of government securities that are highly liquid and can be easily sold to raise money. Currently, while banks have to hold 19.25 per cent of deposits as SLR, they hold close to 26 per cent (overall system level). Hence, they can pledge these securities to raise money at the repo window.

From January 2015, banks were also required to meet the guidelines on the minimum liquidity coverage ratio (LCR) set out under Basel III. The main objective of the LCR is to ensure that banks maintain sufficient liquid assets to meet obligations in a 30-day stress scenario.

The LCR requires that the stock of liquid assets should equal to 100 per cent (from January 2019) of the total net cash outflows over 30 days. As banks have to maintain such liquid assets over and above the mandated SLR requirement, the RBI has allowed banks to dip into a portion of their government bonds held under the mandated SLR requirement to count as liquid assets for computing LCR.

Currently, government securities under the MSF (2 per cent of NDTL), and FALLCR at 13 per cent of NDTL within the mandated SLR, can be used for computing LCR.

The RBI has now allowed government securities up to another 2 per cent of NDTL (0.5 per cent every quarter until April 2020) under FALLCR to be taken into account for LCR. Essentially, banks can dip into government bonds under mandated SLR to the extent of 17 per cent of NDTL for meeting LCR requirements by April 2020. What this implies is that 2 per cent of NDTL, which works out to ₹2.6-lakh crore, has the potential to get released into the system over the next four quarters. Banks can borrow funds against these bonds to meet liquidity requirements.

However, the actual amount released will depend on a number of factors. One, given that each bank will have different liquidity constraints, the extent of funds flowing back into the system will vary from one bank to another. Two, it also needs to be seen how efficiently banks can deploy these funds that get released. Banks can only borrow up to 1 per cent of the NDTL at the repo rate of 6 per cent now. Additional requirement of funds will have to be raised at the MSF window, which comes at a higher cost of 6.25 per cent.

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