The Reserve Bank of India has undertaken new norms that will categorize money into digital accounts referred to as ‘hot money’ with an increase in flight risk. The decision was taken with respect to the recent developments, which involve the crisis faced by Silicon Valley Bank last year when deposits were withdrawn from the bank within hours.
The RBI has taken new guidelines for the coverage of liquidity ratio, which require banks to allot higher retail depositories, which could easily be accessed through the internet and mobile banking. It means that the stable depositories will have a 10% run-off, whereas the less stables will have 15% run-off factor facilities. The run-off is basically the percentage of the deposits to be withdrawn. The norms given by the liquidity coverage ratio will ensure that banks have an ample amount of funds to meet short-term crises. Liquid assets of higher quality could easily be converted into cash with little or no cost.
From April 1, 2025, onwards, the new norms given by LCR will come into existence. Nowadays, banking has undergone fast transitions over the years. The increase in technology usage has led to the ability to make bank transfers and withdraws instantly, but it has also led to an increase in multiple risk factors. However, the Central Bank of India said that recent developments could be seen in several banks with the establishment of LCR frameworks.
Moreover, the new guidelines would require unsecure assets from small businesses. While the customers will be treated as retail depositors, the new run-off facilities should also be applicable to them.
