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Banks’ overnight SDF balances eligible for LCR computation: RBI

by WorldFinance
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Overnight balances held by banks with the Reserve Bank of India under the Standing Deposit Facility (SDF) will be eligible as level-1 high quality liquid assets for the computation of Liquidity Coverage Ratio, the central bank said on Wednesday.

RBI made the announcement after banks sought clarity on the treatment of SDF under the Liquidity Risk Management Framework.

RBI’s circular, which comes into effect immediately, applies to all commercial banks, but leaves out local area banks, regional rural banks and payments banks, the central bank said.

SDF was institutionalised this April and replaced the reverse repo rate as the lower bound of the Liquidity Adjustment Corridor. The repo rate represents the middle of the corridor while the Marginal Standing Facility represents the higher end.

The SDF rate, which is 25 basis points below the repo rate, is currently at 5.65 per cent.

Over the past few years, banks have largely parked excess funds with the RBI as liquidity in the banking system has been maintained at a large surplus.

As a part of the reforms carried out after the global financial crisis, the Basel Committee on Banking Supervision had launched the LCR, which calls for banks to maintain high-quality liquid assets to meet 30 days of net outgo under stressed conditions.

In India, banks were already required to put aside a portion of their deposits in liquid assets under the Statutory Liquidity Ratio (SLR), which primarily consists of government bonds. Given that the liquid assets under the SLR requirement and those needed for LCR are largely the same, RBI has been permitting banks to use a progressively larger proportion of SLR bonds to be used for LCR computation.

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