Nifty Bank Drops Over 1% as RBI Tightens Liquidity Coverage Rules

Nifty Bank declined by nearly 1 per cent on Friday morning after RBI introduced new LCR guidelines to prevent retail deposit run-off

Outlook Business Desk

Updated on: 26 July 2024 10:41 am

RBI

Nifty Bank slipped more than 1 per cent during morning trade hours on Friday after the Reserve Bank of India (RBI) issued a new set of guidelines on the Liquidity Coverage Ratio (LCR). The new rules will mandate banks to implement special measures to prevent the excessive run-off of retail deposits.

This new framework comes as people are increasingly shifting towards digital space for banking services.

"Banking has undergone rapid transformation in recent years. While increased usage of technology has facilitated the ability to make instantaneous bank transfers and withdrawals, it has also led to a concomitant increase in risks, requiring proactive management," the central bank stated in a draft circular.

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At 10:20 am, the banking index was trading at 50,774 level mark, down by 113 points or 0.22 per cent.

"Runoff," more often than not, refers to the outflow of deposits from banks or other financial institutions. This can happen naturally as customers withdraw their funds, pay off their loans or when deposits and loans reach their maturity.

In the context of deposits, excessive runoff can mean a high rate of withdrawals, which might put the bank's liquidity under stress.

To enhance the "liquidity resilience of banks," the central bank has introduced the following measures:

-Additional Run-off for IMB-enabled Retail Deposits: Banks shall assign an extra 5 per cent run-off factor for retail deposits with internet and mobile banking (IMB) facilities.

-Run-off Factors for IMB-enabled Deposits: Stable retail deposits with IMB have a 10 per cent run-off factor, while less stable deposits with IMB have a 15 per cent run-off factor.

-Unsecured Wholesale Funding Treatment: Funding from non-financial small business customers will be treated the same as retail deposits in terms of run-off factors

-Government Securities as HQLA: Government securities under level-1 high quality liquid assets (HQLA) will be valued at an amount not greater than their current market value (subject to applicable haircuts)