RBI increases threshold for deposits, other funds of non-financial small businesses by 50% to Rs 7.5 crore

The Reserve Bank has increased the threshold for deposits and other funds of non-financial small businesses by 50 per cent to Rs 7.5 crore for the purpose of maintenance of Liquidity Coverage Ratio (LCR), with the aim to better align its regulations with Basel norms and also enable banks to manage liquidity risks more effectively.

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The existing cap was Rs 5 crore, the central bank said on Thursday, adding the new framework will be effective immediately.

Issuing the revised Basel III framework on liquidity standards -- liquidity coverage ratio (LCR), liquidity risk monitoring tools and LCR disclosure standards and net stable funding ratio -- for small business customers, the monetary authority said these revisions are aimed at helping banks manage their liquidity risks more effectively by aligning them with the norms as set out by the Basel Committee on Banking Supervision (BCBS).

Accordingly, the cap on deposits and other 'extensions of funds' has been increased to Rs 7.5 crore from the present threshold of Rs 5 crore for small businesses when it comes to maintaining the LCR, the regulator said.

The above modification is also applicable to deposits and other 'extensions of funds' received from small businesses, the regulator said, adding the new norms are applicable only to commercial banks.

By 'extensions of funds' RBI means funds in banks in the form of retail exposures which are generally considered as having similar liquidity risk characteristics to retail accounts, while aggregated funds refer to gross amount of all forms of funds such as deposits, debt securities or similar derivative exposures for which the counter-party is known to be a small business customer and therefore are deemed retail deposits.

All such funds should not exceed Rs 7.5 crore per account, the monetary authority said.

This means that a bank treats such deposits in its internal risk management systems consistently over time and in the same manner as other retail deposits, and that such deposits are not individually managed in a way comparable to larger corporate deposits.

But the new norms retain the net stable funding ratio at 90 per cent of the liabilities as the available stable funding factor, which comprise demand deposits and/or term deposits with residual maturities of retail and small business customers under one-year maturity.