RBI guidelines seeks to limit ability of banks to grow on the back of wholesale funding, which could prove to be a constraining factor for banks from growing aggressively, says Credit Suisse

The Reserve Bank of India (RBI) released guidelines on liquidity risk management under Basel III requirements, with stress on improving short-term balance sheet liquidity. The underlying purpose of the requirement is to ensure that banks have adequate liquidity to meet their needs even under extreme liquidity stress or market disruptions.

"The guidelines would constrain banks with weaker franchises from growing aggressively, as they would now need to ramp up liability franchises faster. Banks with relatively weaker franchises like Yes Bank, IndusInd Bank and Union Bank of India may see lower net interest margins (NIMs) and higher opex during the transition," says Credit Suisse in a research report.

RBI defined the measure of short-term liquidity – liquidity coverage ratio (LCR) as the ratio of high quality liquidity assets with banks to net cash outflows over the next 30 days.
 

The Implementation of these guidelines is being phased out to January 2019, limiting the potential impact during the transition. The guidelines put emphasis on granularity of funding and discourage excessive reliance on short-term funding. This would avoid a build-up of systemic risk by limiting a bank’s ability to grow on volatile wholesale funding.

"The guidelines will push banks towards more stable sources of funding and in turn towards lesser wholesale funding and greater granularity in deposits. Banks with weaker liability franchises will have to accelerate their liability franchise build-up. The guidelines will likely avoid build-up of systemic risk by limiting the ability of banks to grow on back of wholesale funding," the report said.

RBI has laid down stringent requirements factoring in potential run-down of deposits (5-10%) and claims arising from derivatives exposure under stress scenarios.

Credit Suisse said, "This could prove to be a constraining factor for banks from growing aggressively as they would now need to ramp up their liability franchises accordingly. Banks with weaker franchises may see lower NIMs and higher opex during the transition. RBI is further likely to come out with guidelines to address long-term asset liability management (ALM) mismatches (NSFR ratio – net stable funding ratio) under Basel III requirements, adding to the need for accelerated franchise build-ups. HDFC Bank, Axis Bank and ICICI Bank, driven by strong liability franchise and investment done in branch expansion over the past few years, are well placed to accelerate loan growth."