Double standards: India aims to reconcile Basel liquidity ratios with domestic rules

The recent financial crisis was one of liquidity rather than solvency but as the Basel Committee looks at the best way to legislate for this risk, India is facing a different issue: how to integrate its already tough liquidity framework with the new international standards. Deepak Singhal, chief general manager at the Reserve Bank of India, speaks to Asia Risk

One of the key problems for Asian states in implementing the Basel III accord is the issue of liquidity. And while Hong Kong has had to resort to allowing local banks to take on foreign currency assets and Australia has had to create a liquidity facility for its banks, India’s historic focus on liquidity management means it already has a complex set of rules on this issue which it is trying to integrate with the approach taken by the Basel Committee on Banking Supervision.

Indian bank regulation currently includes the statutory liquidity ratio (SLR) where the banks are mandated to carry a minimum of 24% of their daily net demand (current and savings accounts) and time liabilities (fixed term deposits) as liquid assets in the form of cash, gold or other approved securities which include Indian government Treasury bills.

Additionally, banks have a cash reserve ratio (CRR) which is a proportion of deposits that they are required to maintain with the Reserve Bank of India (RBI) of 4.75% of the net demand and time liabilities over a fortnight, with a further restriction that 70% of the average fortnightly CRR average has to be in the form of cash with the RBI.

As a result, the current RBI system means about 30% of Indian banks’ liabilities are in liquid form. By contrast, Basel III’s liquidity coverage ratio requires a minimum of 100% of net cash outflows over a 30-day period to be held in high quality liquid assets. Deepak Singhal, chief general manager in charge, department of banking operations and developments at the RBI, with responsibility for implementing the country’s liquidity framework, says discussions are ongoing over how to reconcile the two approaches.

Given the exacting nature of the current approach to liquidity the RBI could seemingly just stick to its own approach, but Singhal says the regulator is focused on meeting the requirements of the Basel accord.

“The Basel norms are certainly more stringent than the current Indian system – but the only issue is how much of the existing SLR and CRR requirement may be carved out exclusively towards Basel III requirements.”

Since the release of the guidelines, a number of market participants and research firms speculated on the amount of additional capital Indian banks will need in order to comply with Basel III. Fitch, the rating agency, contends that state sector banks in India will have to raise a collective US$40 billion in capital while private sector banks will need US$10 billion. Singhal however, downplays these concerns.

“Any capital shortfall in public sector banks will be filled by the Indian government. There are a lot of estimates in the public domain on how much shortfall there is – the RBI has its own calculations too – but I don’t want to comment on those as the numbers themselves are unimportant. It is crucial that the RBI is confident that those numbers are achievable, as is the case now,” he says.

The state sector banks will receive capital injections from the Indian government, which will fund the banks through an expected increase in tax collections as well as its disinvestment scheme where it sells its stake in a number of nationalised firms. “When the economy grows it brings about an increase in capital requirement but it also leads to an increase in tax revenue. So the government should be able to generate the additional funds,” says Singhal. 

Unlike their western counterparts, Indian banks have had to contend with higher credit growth stemming from a fast growing economy. According to Singhal, if Indian banks are not subject to Basel III, they would still require higher capital levels to match the growth in credit. He says: “Basel III has added to the requirement by about 30–40%. So banks are faced with a significant challenge, however they are fairly well geared to meet it.”

The Basel norms are certainly more stringent than the current Indian system