RBI raises LCR ratio carve-out from SLR, what it means for banks, consumers

The Reserve Bank of India (RBI) today increased policy repo rate by 25 basis points in the second bi-monthly monetary policy meet of FY19. This is the first hike in repo rate in four years of Narendra Modi government. The repurchase (repo) rate now stands at 6.25% from previous 6%. Consequently, the reverse repo rate stands adjusted to 6 per cent, and the marginal standing facility (MSF) rate and the bank rate to 6.50%. However, while rates increased across indicators, the central bank also decided to hike the Liquidity Coverage Ratio (LCR) carve-out from Statutory Liquidity Ratio (SLR). 

RBI in it’s developments page, highlighted that, as per the existing roadmap, scheduled commercial banks have to reach the minimum Liquidity Coverage Ratio (LCR) of 100% by January 1, 2019. 

Presently, the assets allowed as Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing LCR of banks include, inter alia, Government securities in excess of the minimum SLR requirement. 

Within the mandatory SLR requirement, Government securities to the extent allowed by RBI under Marginal Standing Facility (MSF) currently stands at 2% of the bank's NDTL and under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) is at 9% of the bank's NDTL.

RBI said, “ For the purpose of computing LCR, it has been decided that, in addition to the above-mentioned assets, banks will be permitted to reckon as Level 1 HQLAs Government securities held by them upto another 2% of their NDTL under FALLCR within the mandatory SLR requirement. Hence, the total carve-out from SLR available to banks would be 13% of their NDTL.

It added, “ The other prescriptions in respect of LCR remain unchanged.”

LCR refers to highly liquid assets which are held by financial institutions to meet short term obligations. 

The LCR promotes short-term resilience of banks to potential liquidity disruptions by ensuring that they have sufficient high quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days.

LCR aims to ensure that a bank maintains an adequate level of unencumbered HQLAs that can be converted into cash to meet its liquidity needs for a 30 calendar day time horizon under a significantly severe liquidity stress scenario specified by supervisors. 

At a minimum, the stock of liquid assets should enable the bank to survive until day 30 of the stress scenario, by which time it is assumed that appropriate corrective actions can be taken. 

Apart from Cash Reserve Ratio (CRR), banks are needed to hold a certain percentage of NDTL in forms of securities like government bonds, gold, cash, etc.

This certain portion is called as SLR – which is done to ensure banks have enough of funds available to pay back to its customers who may have any immediate requirement to encash their deposits.

In case of lower SLR, banks have higher ability to give credit which means further room for a cut in marginal cost fund based of lending rates (MCLR) making people to opt for more loans for various purpose. 

RBI said that liquidity has been at surplus from April to May 2018. 

During April, RBI absorbed surplus liquidity of Rs 496 billion on a daily net average basis due to increased government spending, especially in the second half of the month. Reflecting easy liquidity conditions, the weighted average call rate (WACR) softened to 5.89 per cent in April (from 5.96 per cent in March). 

However, surplus liquidity in the system moderated considerably in the first half of May and the system moved into deficit in the third week of May mainly due to inflows on account of the goods and services tax (GST). 

RBI conducted an open market operation purchase auction on May 17, 2018 to inject liquidity of Rs 100 billion into the system. The system again turned into surplus in the last week of May reflecting mainly the payment of food subsidies. 

Surplus liquidity absorbed under the LAF on a daily net average basis declined to Rs 142 billion in May. The WACR in May at 5.88 per cent remained broadly at the April 2018 level.