RBI issues instructions to banks

The Reserve Bank of India (RBI) has directed certain banks, including a major private bank, to address liquidity management issues, particularly related to asset-liability management (ALM) mismatches. The RBI’s monthly tracking of liquidity revealed that these banks were not aligning with the recommended ALM positions.

Upon receiving the RBI’s caution, many banks have taken steps to course-correct and enhance their liquidity management. According to a banking industry official, these banks are now actively improving their management of liquidity buckets based on the feedback from the RBI.

Smaller private banks and small finance banks, which heavily rely on market borrowings and RBI windows, tend to exhibit a liquidity profile skewed towards short-term borrowings, as explained by another banking industry official. While this may not be problematic in certain cases, the RBI’s tracking revealed instances where this trend was becoming structural. Consequently, these banks were advised to strengthen their deposit base and establish stable liquidity buffers for the longer term.

Anonymous sources familiar with the matter stated that these institutions were increasingly resorting to short-tenor borrowings and RBI windows to address their liquidity gaps, even though overall liquidity in the system remained robust. Some banks with substantial deposits had not utilized their bond investments and were instead using certificates of deposits and other market borrowings to meet reserve requirements.

The RBI’s communication with these banks aimed to provide preliminary feedback and raise awareness about its monitoring of such metrics. Addressing liquidity issues promptly is crucial to prevent further complications within the banking system, according to the second source. In meetings and correspondences, the RBI urged these banks to increase their longer-term borrowings to enhance their asset-liability management profiles.

It is worth noting that liquidity conditions vary across institutions, with smaller banks relying more on market borrowings and RBI windows, while larger entities have excess liquidity. The RBI highlighted the dependence on short-term liquidity in the case of a major private bank, and the bank has since taken corrective measures over the past two months.

Although India has not witnessed any significant bank failures since Palai Central Bank in 1960, the RBI has often intervened to rescue stressed institutions through forced mergers or other measures. Notably, YES Bank was bailed out by a consortium of banks led by State Bank of India in 2020. However, the recent liquidity-driven problems faced by smaller banks in the US, leading to failures and regulatory intervention, have coincided with the RBI’s monitoring of liquidity in the Indian banking system.