RBI prescribes exposure limit to deal with liquidity risk

MUMBAI: In order to enhance the risk management of the banking system, the Reserve Bank today prescribed tolerance limits for loan exposure to deal with mismatches between assets and liabilities as part of the final guidelines on liquidity risk management.

"Long term resources should not fall below 70 per cent of long term assets and long and medium term resources together should not fall below 80 per cent of the long and medium term assets," the RBI said in the guideline.

These controls should be undertaken currency-wise, and in respect of all such currencies which individually constitute 10 per cent or more of a bank's consolidated overseas balance sheet, it said.

As per the guideline, the short term is defined as asset or liability maturing within 6 months while medium term with the timeframe between 6 months to 3 years.

Long term means assets or liability with the tenor of 3 years and beyond.

Enumerating broad norms in respect of liquidity management, the guidelines said the bank should not usually give loans beyond 10 years.

"Banks should not normally assume voluntary risk exposures extending beyond a period of ten years," it said.

"Banks should endeavour to broaden their base of long-term resources and funding capabilities consistent with their long term assets and commitments," it added.

The norms include enhanced guidance on liquidity risk governance, measurement, monitoring and the reporting to the Reserve Bank on liquidity positions, it said, adding, the enhanced liquidity risk management measures are required to be implemented by banks immediately.

The central bank also asked lenders to make public disclosures on a regular basis that will help market participants to make informed judgments about the soundness of its liquidity risk management framework and liquidity position.

The RBI also advised banks to conduct stress tests at regular intervals and across different maturities and profiles.

"Banks are encouraged to have stress tests with various survival horizons in mind, say one month or less; two or three months; and six months or more, etc," the RBI said.

The RBI has asked banks to put in place the guidelines on intra-day liquidity risk management strategy by December 31.