The Hindu : Business : Cap on interbank liabilities imposed

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Wednesday, Mar 07, 2007
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Cap on interbank liabilities imposed

Special Correspondent

RBI cautions banks on wholesale deposits

CHENNAI: The Reserve Bank of India (RBI) on Tuesday announced regulations on inter-bank liability (IBL) to control "concentration risk" on the asset side and also systemic risks that might arise as a result of uncontrolled ABLs.

In a circular to commercial banks, the RBI said the IBL of banks should not exceed 200 per cent of its net worth as of March 31 of the previous year. However, individual banks may, with the approval of their boards, might fix a lower limit, keeping in view their business model.

The new measures will come into effect from April 1.

The apex bank said that banks whose CRAR (capital-to-risk-weighted assets ratio) was at least 25 per cent more than the minimum CRAR of nine per cent, namely, 11.25 per cent, of the previous, year, would be allowed to have a higher limit of up to 300 per cent of the net worth for IBL.

The limit prescribed will include only fund based IBL within India (including inter-bank liabilities in foreign currency to banks operating within the country). The limits will not include collateralised borrowings under the CBLO (collateralised borrowing and lending obligation) and refinance from National Bank for Agriculture and Rural Development (Nabard) and Small Industries Development Bank of India (SIDBI), it said.

The existing limit on the call money borrowings will operate as a sub-limit within the abovementioned limits.

Significantly, the RBI also cautioned that "banks having a high concentration of wholesale deposits should be aware of potential risk associated with such deposits" and advised them to frame suitable policies to contain the liquidity risk arising out of excessive dependence on such deposits. Banks which are not in a position to comply with these requirements from April 1 should furnish a plan for approval to the RBI indicating the date by which they would comply with them, the circular said.

Transparency

In a bid to check hidden costs and inject more transparency, the RBI made it mandatory for banks and financial institutions (FIs) to mention in its loan applications the fees, processing charges and other details. In a circular, the RBI also made it clear that if a loan or credit card application was rejected, banks and financial institutions should give in writing the reasons for it. It also wanted banks and FIs to work out a transparent policy in this regard with the approval of their boards.

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