The Reserve Bank of India has imposed caps on inter-bank liabilities from April 1, 2007, as several banks, particularly the smaller ones, have been borrowing heavily to tide over tight liquidity.
The central bank also asked banks with high concentration of wholesale deposits to contain the liquidity risk arising out of excessive dependence on such deposits.
Bulk deposits constituted nearly 20 per cent of term deposits of the banking sector, banking sources said.
The inter-bank liabilities were capped at 200 per cent of net worth on March 31, 2006.
The move is likely to affect smaller banks -- private, public as well as foreign -- as they have lower net worth compared to large banks like State Bank of India, which has a net worth of Rs 28,000 crore (Rs 280 billion).
The RBI said banks which are not in a position to comply with the cap on inter-bank borrowing from April 1, 2007, will need to furnish a plan for approval indicating the date by which they would be able to meet the new requirements.
It said bank boards may fix a lower limit for their inter-bank liabilities, keeping in view their business model.
While the counterparty concentration risk on the assets side attracted attention and received regulatory policy response, the concentration risk on the liability side of the banks had not received similar attention, the RBI said.
Liability side management has its own merits from the point of view of financial stability. Controlling the concentration risk on the liability side of banks is, therefore, as important as controlling the concentration risk on the asset side. More particularly, uncontrolled inter-bank liabilities may have systemic implications, even if, the individual counterparty banks are within the allocated exposure," it said.
The RBI added, "Uncontrolled liability of a larger bank may also have a domino effect. In view of this, it has become important to put in place a comprehensive framework of liability management so that banks are aware of the risks inherent in following a business model based on large amount of IBL and the systemic risks such a model may entail."
Meanwhile, the RBI has asked banks to convey in writing the reason for rejecting loan applications and also mandated that loan application forms across all categories of loans, irrespective of the amount, should be comprehensive. It has advised banks to incorporate these measures in their fair practices code with the approval of their boards by April 30, 2007.
Earlier, these guidelines were applicable only to priority sector and other advances up to Rs 200,000.