India wants far stronger banks

The tough liquidity ratios that allowed India’s banking system to withstand the worst of The Great Recession will get even tougher.

The Reserve Bank of India, the central bank, has ordered that banks maintain additional liquid assets as part of Basel III guidelines over and above previously mandated levels. Banks will need to adhere to these tougher rules until June 2012, according to new draft guidelines.

The new guidelines order banks to maintain high-quality liquid assets that includes cash and government bonds. It expects these liquid assets to be converted into cash to meet liquidity needs for a 30-day period under a stress situation.

To qualify as high-quality, cash reserves and government bond holdings need to be in excess of the mandated levels of the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR).

CRR, which stands at 5.5%, is the share of deposits that banks must set aside in cash with the RBI. SLR is the minimum amount of investments banks need to make mostly in government securities. This is pegged at 24%.

"Banks are expected to meet this requirement continuously and hold a stock of unencumbered, high-quality liquid assets as a defence against the potential onset of severe liquidity stress," RBI said.

These holdings will constitute the liquidity coverage ratio, which can help banks tide over potential short-term liquidity disruptions. RBI said that existing liquidity ratios like CRR and SLR have successfully cushioned Indian banks following The Great Recession of 2008.