1. A study of its implementation in India and comparison of
LCR across Indian Banks
Under the Guidance of:
Mr. Samir Doshi
Vice President, IndusInd Bank
Dr. V S Kaveri
Consulting Professor, NIBM
2. IndusInd Bank
•Conceptualized by Mr.Srichand P. Hinduja
•Started in 1994
•Initial capital base of 100 Crore INR
The dawn
•Fifth largest private bank in India by market capitalization
•Has 801 branches and 1487 ATMs as on 31st March, 2015
•Is included in NIFTY 50
Current
Standing
•One of the reputed banking brands; Ranked 19th amongst the Top
50 Most Valuable Indian Brands 2014 as per the BrandZ
•Brand statement 'You desire, We Deliver'
Brand
•My Account My Number, Choice Money ATMs, Check-on-Cheque,
Cash-on-Mobile, Direct Connect, Quick Redeem Service and 365 Days
Banking.
•Video Branch
Innovations
3. Liquidity Coverage Ratio
The Liquidity Coverage Ratio (‘LCR’) states that at minimum and
on an ongoing basis, the banks must maintain an adequate level of
unencumbered High Quality Liquid Assets (HQLA) that can be
converted into cash to meet its liquidity needs for a 30 calendar day
time horizon under severe liquidity stress scenario.
LCR = ≥ 100%
LCR
Total Net Cash
outflow
HQLA
4. Why LCR was introduced?
During the early “liquidity phase” of the financial crisis that began in 2007, many banks
– despite adequate capital levels – still experienced difficulties because they did not
manage their liquidity in a prudent manner. The crisis drove home the importance of
liquidity to the proper functioning of financial markets and the banking sector.
2008
BCBS introduces "Sound
Principles"
Dec, 2010
BCBS issues Original
Standards on LCR
January 7, 2013
BCBS issues Final Standards
on LCR
June 9, 2014
RBI issues final guidelines on
LCR
Milestones in Implementation of LCR
5. LCR: Compliance timeline in major economies
Jan 1, 2015 Jan 1, 2016 Jan 1, 2017 Jan 1, 2018 Jan 1, 2019
BCBS LCR Framework 60% 70% 80% 90% 100%
EU CRD IV 60% 70% 80% 100% 100%
U.S. LCR Proposal 80% 90% 100% 100% 100%
LCR: Implementation Timeline in India
6.
7. Methodology ..1/2
The Sample of Banks :15 banks; 10 PSBs, 5 Private
Coverage: Approximately 35%
of Banking sector; 37% of PSBs
and 33% of Private banks.
Source of Data: Annual
Reports(FY 15) of the
respective banks.
8. Banks are classified as Compliant (LCR>=60%) and Non
Compliant (LCR<60%)
Composition of Total Cash Outflows, Total Cash Inflows
Comparison Study of LCR by Bank Groups(PSBs Vs Private
Banks)
Comparison Study of LCR across Banks using Stata
As the banks of various size are involved in the diverse
sample, all the components of LCR are normalized by the
Total Assets of the respective bank.
Comparison of LCR of IndusInd bank with that of other
Banks
Methodology ..2/2
9.
10. All the banks in
the sample are
compliant.
34%
13%
53%
60% to 79.99%
80% to 100%
Greater than 100%
More than half of the banks
are already compliant with
100% requirement.
4 Banks have
LCR less than
70%(next hurdle).
The Breakup of Banks based their LCR.
# of Compliant Vs Non Compliant banks
12. R² = 0.3587
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16
LCR
Percentage of Weighted Wholesale Funding
LCR
Scatter Plot of Normalised Wholesale Funding to the LCR
13. 23%
61%
7%
4%
5%
Retail & Small Business
Wholesale funding
Derivatives, Debt and
Credit and liquidity
Other contractual
funding obligations
Other contingent
funding obligations
Composition of Total Cash Outflows
Composition of Total Cash Inflows
14. 3.49%
8.94%
1.51%
0.71% 0.70%
1.64%
10.06%
7.13%
2.80%
0.18%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
All Banks
IndusInd Bank
At 6.93%, IndusInd bank’s Total
HQLA (weighted) as a percentage of
Total Assets is lowest among the
Sample.
IndusInd bank’s Total Cash outflow
as a percentage of its total Assets is
the highest among the banks
analyzed.
The Bank has healthy Cash inflows.
Lower proportion of HQLA is led to
lower value of LCR.
Normalised Outflows
of IndusInd Bank Vs
Other banks
15. Conclusions & Recommendations …1/2
All the banks analyzed have met the minimum requirement
with ease.
As it stands out right now, most banks are already on course to
meet the final requirement of maintaining 100% LCR.
With the economy picking up, there will be increase in the
demand for credit. Therefore, going forward active balance
sheet management is required to meet the future requirement
milestones.
Banks must improve their CASA, and reduce their dependency
on the wholesale funding to improve their LCR values.
16. Conclusions & Recommendations …2/2
In order to comply with the future milestones and improve its standing
in the industry with respect to LCR, it is suggested, the bank should
carry out following actions:
Improve its High Quality Liquid Assets by increasing investments in
SLR category assets and other Level 2 category assets.
Reduce the Total Cash outflows.
Specifically, the bank must reduce its dependency on the wholesale
funding. It must focus on building stable retail deposits.
More importantly, it must reduce its exposure to the Derivatives and
other collaterals.
Also, decrease the exposure towards other contractual obligation.
Maintain current pattern of excellent Total Cash inflows.
17. Scope for Future Study
A Study similar to this can be undertaken every year to
analyze whether the banks are compliant with the
guidelines.
The study can be further deepened to further analyze the
changes in the composition of HQLA, Cash outflows, Cash
Inflows over the years.
