A sensitivity analysis of the liquidity risks by the central bank shows that Indian banks could be resilient even if there is sudden and unexpected withdrawal of around 15 per cent of deposits and at the same time 75 per cent of credit commitments utilised.
Assuming severe stress in the system fearing safety of their money, the depositors would rush to withdraw un-insured deposits in stress scenario. Simultaneously borrowers would do their best in increasing the usage of unutilised portions of sanctioned working capital limits as well as utilisation of credit commitments and guarantees extended by banks to their customers. Though the COVID- induced lockdown which prompted the central bank to adopt an aggressive accommodative stance has so far has not resulted in any perceptible adverse conditions in the market, risks continue to remain.
“Banks, in general, may be in a position to withstand liquidity shocks with their high-quality liquid assets-” the Reserve Bank said in its financial stability report. Banks have a comfortable buffer of HQLAs to meet their day to day liquidity needs, RBI’s analysis showed. HQLAs are pegged at 24.6 per cent of their total assets in a baseline scenario and 15.4 per cent of the total assets in a severe stress situation are available to banks to meet their liquidity needs.
HQLAs are normally excess invested in monetary instruments over what is mandatorily needed to be made by the central bank. In the Indian context it would be cash reserves in excess of required CRR, excess SLR (statutory liquidity ratio) investments besides the additional SLR maintained under RBI’s marginal standing facility and also additional SLR investments at 15 per cent of NDTL as stipulated by the central bank in April 2020, in order to boost liquidity in the system.
The assessment of liquidity risk is significant as the central bank has flagged of risks of its accommodative stance. “While easy financial conditions are intended to support growth prospects they can have unintended consequences in terms of encouraging leverage, inflating asset prices and fuelling threats to financial stability” the RBI has said.