Reserve Bank of India to Maintain Higher Digital Deposit Buffer Requirement

Reserve Bank of India to Maintain Higher Digital Deposit Buffer Requirement

The Reserve Bank of India (RBI) is set to proceed with its proposal to impose a higher buffer on digitally accessible deposits, despite objections from the banking sector. According to sources familiar with the matter, the RBI intends to enforce a 5% 'run-off factor' for these deposits starting next April. This decision aims to enhance risk management in the event of rapid withdrawals through digital channels, such as internet and mobile banking.

The Indian Banks' Association (IBA) has lobbied for a reduction in this buffer, suggesting a lower threshold of 2% or 3% to mitigate potential liquidity impacts. The association argues that the higher buffer could strain banks' liquidity coverage ratios (LCR), which measure the amount of high-quality liquid assets available to meet short-term obligations.

Despite these concerns, the RBI is expected to uphold the proposed 5% run-off factor. Sources close to the RBI's decision-making process indicate that the final regulations are likely to remain unchanged. One source noted, "It would be surprising if the RBI were to adopt the IBA's recommendation."

The RBI's move reflects heightened global regulatory scrutiny following the collapse of Silicon Valley Bank in March 2023, which highlighted vulnerabilities related to digital banking. In India, where retail and small business accounts constitute approximately two-thirds of total deposits—with over 50% being digitally accessible—the RBI's proposed rules aim to fortify financial stability.

A Moody's estimate underscores that the liquidity profile of banks has been a key consideration, and the 5% buffer is deemed reasonable. The RBI may, however, contemplate a phased implementation of the run-off factor, according to additional sources.

If the proposed regulations are implemented, analysts predict an increased demand for government bonds as banks adjust their liquidity strategies. Rating agency ICRA forecasts that a 10% reduction in banks' LCR could necessitate an additional requirement of nearly four trillion rupees in government securities.

The RBI is currently reviewing feedback on the proposed norms, with final decisions expected to be made by senior management. The central bank has not yet responded to requests for official comment.