RBI wants banks to hold more liquid assets

The Reserve Bank of India said on Tuesday that banks need to maintain additional liquid assets as part of Basel III guidelines, over and above previously mandated levels.

Banks will need to adhere to these norms from the month or quarter ending June 2012, the RBI said in its draft guidelines on "Liquidity Risk Management and Basel III Framework on Liquidity Standards."

Indian banks currently need to meet RBI-set requirements of cash reserve ratio (CRR), and statutory liquidity ratio (SLR).

The CRR, or the share of deposits that banks must set aside in cash with the RBI, is 5.5 percent, and SLR, or the minimum amount of investments that banks need to make mostly in government securities, is 24 percent.

As part of the guidelines, banks are expected to maintain "high-quality" liquid assets, which includes cash and government bonds, which can be converted into cash to meet liquidity needs for a 30-day period under a stress situation.

To qualify as high-quality, the cash reserves and government bond holdings need to be in excess of the mandated levels of CRR as well as SLR, the RBI said.

"Banks are expected to meet this requirement continuously and hold a stock of unencumbered, high-quality liquid assets as a defence against the potential onset of severe liquidity stress," the RBI said.

These holdings will constitute the liquidity coverage ratio, which can help banks tide over potential short-term liquidity disruptions.

The RBI Governor Duvvuri Subbarao has earlier mentioned that existing liquidity ratios, like CRR and SLR, have been a cushion for banks following the Lehman Brothers' collapse in September 2008, and have held in good stead for the banking system as a whole.

Source: EconomicTimes