By aligning LCR standards for small business accounts with Basel standards, RBI raises funding ceiling by 50 percent


The existing limit was 5 million rupees, the central bank said on Thursday, adding that the new framework would take effect immediately.

The Reserve Bank increased the threshold for deposits and other assets of non-financial small enterprises by 50 percent to Rs 7.5 million in order to maintain the liquidity coverage ratio (LCR), in order to better align its regulations with Basel norms and enable banks to manage liquidity risks more efficiently.

The existing limit was 5 million rupees, the central bank said on Thursday, adding that the new framework would take effect immediately.

Announcing the revised Basel III framework on liquidity standards – liquidity coverage ratio (LCR), liquidity risk monitoring tools and LCR detection standards and net stable funding ratio – for small business clients, the Monetary Administration said these revisions aim to help banks manage their liquidity risks more efficiently by complying with the standards set by the Basel Committee on Banking Supervision (BCBS).

Consequently, the limit on deposits and other ‘asset extensions’ has been increased to Rs 7.5 million from the current threshold of Rs 5 million for small businesses when it comes to maintaining LCR, the regulator said.

The amendment is also applicable to deposits and other ‘extension funds’ received from small businesses, the regulator said, adding that the new standards apply only to commercial banks.

By ‘extensions of funds’ RBI denotes assets in banks in the form of exposures to individuals that are generally considered to have similar liquidity risk characteristics as in retail accounts, while aggregate assets refer to the gross amount of all forms of assets such as deposits, debt securities or similar exposures to derivatives for which it is calculated – the party is known to be a small business client and is therefore considered to be retail deposits.

All such funds should not exceed 7.5 million rupees per account, the monetary administration said.

This means that the bank treats such deposits in its internal risk management systems consistently over time and in the same way as other retail deposits, and that such deposits are not managed individually in a manner comparable to larger corporate deposits.

But the new norms keep the ratio of net stable financing to 90 percent of liabilities as an available factor of stable financing, which consists of demand deposits and / or time deposits with residual maturity of individuals and small enterprises below one year.

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