RBI last week issued a draft guideline for banks on Liquidity Coverage Ratio (LCR). In this, they have been asked to keep more liquid securities aside as a buffer on deposits.
This will help banks to deal with the situation when depositors suddenly withdraw their money from the banks. These rules will come into effect from April 1, 2025. Let’s try to know about this in detail.
Why did RBI change the rule?
In simple words, RBI is a little concerned about the fast paced technology (mobile, internet banking). Customers can withdraw a lot of money deposited in banks with just one click. Earlier the situation was not like this, when it took a lot of time to withdraw money deposited in banks. Customers had to first go to the bank branch, fill a form. Only then the money was withdrawn.
RBI itself has admitted that there has been a big change in banking in recent years. It has said, “With the increased use of technology, it has become very easy to transfer and withdraw money instantly, but this has increased the risk. To deal with this, active management is necessary.” This is the reason why the central bank has made changes in the LCR framework. This will increase the capacity of banks in terms of liquidity.
What does this mean for banks?
RBI has said that banks will have to set aside an additional 5% run-off factor for retail deposits that are linked to internet and mobile banking facilities. In other words, a 10% run-off factor will have to be set aside for stable retail deposits with internet and mobile banking (IMB) facility. Also, a 15% run-off factor will have to be kept aside for low stable deposits with IMB facility.
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If we leave aside the technical part of this issue, then it simply means that RBI has asked the banks to be cautious about the deposits which are linked to facilities like internet and mobile banking. The reason for this is that such deposits can be withdrawn from the banks at any time.
How will the new guidelines affect banks?
Actually technology is like Bhasmasura. It makes you powerful but if not used properly, it can also destroy you. The RBI which had earlier advised banks to use technology is today worried about its technology in the matter of deposits. RBI’s new guidelines have increased the difficulties for banks. Banks are already trying to increase deposits and deal with the high credit-deposit ratio. For some time now, the credit growth of banks has been more than their deposit growth.
