Central Bank provides further leeway on banks’ liquid asset computation

• Issues fresh instructions providing leeway to manner in which banks calculate and report their liquidity matrices

In a further measure to alleviate the tight liquidity situation faced by the country’s banking sector, the Central Bank last week issued fresh instructions providing some leeway to the manner in which the latter calculates and reports its liquidity matrices. 

In a Banking Act Determination, the Central Bank last week said the banks – both licensed commercial and specialised banks – could treat (i) qualifying non-financial corporate debt securities and (ii) qualifying non-financial common equity shares as part of their liquid assets when they compute their Statutory Liquid Assets Ratio (SLAR). 

The two new instruments have already been considered by the banks, particularly from 2015 onwards, when they compute and report the Liquidity Coverage Ratio (LCR), under the new BASEL III liquidity standards. 

At a minimum, the banks are required to maintain 20 percent of their liabilities, excluding capital, as liquid assets under the SLAR and 100 percent under the LCR, although the calculation mechanisms under each are different. 
However, in November, last year, considering the extraordinary circumstances caused by the economic crisis, the Central Bank in a Direction asked the banks to maintain a minimum of 90 percent in the LCR up to December 2022, as a short-term measure to allow further time for the banks to adjust their liquidity profiles.

In the same Direction, the Central Bank allowed the banks to maintain a minimum SLAR of 20 percent on a consolidated basis for the overall bank, until further notice, in a departure from the practice of maintaining the SLAR separately for the domestic and offshore banking units.The latest move appears to be another step towards easing the conditions for the banks, which are going through liquidity stresses, as a result of the sharp rise in the interest rates.

The banking sector earnings reports for the December 2022 quarter are expected within the next couple of weeks and they would provide a glimpse into their liquidity profiles last year.

The banks are expected to report dismal earnings at least the first three quarters of this year, as they are forced to provide billions on possible bad loans and other financial asset losses, after the economy crashed earlier last year, bringing the growth to a halt.  Liquid assets predominantly consist of the government securities but the ability to consider the two debt and equity instruments is expected to enhance the SLAR, if the banks have reached their regulatory minimum levels under the conventional method of computation.

However, the two asset types should meet a rigorous set of parameters to qualify to be part of the SLAR computation and also there is a limit to which such assets could become part of the liquid assets. 

The Central Bank in recent times took several measures, including last month’s liquidity infusion via reverse repo facility and the limits imposed on the banks’ ability to rely on its standing facility windows, to improve the liquidity conditions in the interbank market.