Rajeshwar Rao: Challenges in liability management - maintaining the balance
Keynote address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the Mint Annual BFSI (Banking, financial services and insurance) Summit & Awards, Mumbai, 17 January 2025.
The views expressed in this speech are those of the speaker and not the view of the BIS.
At the outset, I would like to thank the organisers for inviting me to this 17th edition of the Mint BFSI Summit & Awards. I am delighted to get this opportunity to engage with you during this event. As a regulator for banks and non-banking financial companies (NBFCs), I thought this could be an occasion to reflect on a less debated area for the regulated entities - their liabilities management and the challenges. In flagging the mismatch between deposit and credit growth, Governor Das had previously drawn our attention to the rising challenge in this area. So, I thought of wading in with a few thoughts for your consideration.
Introduction
The core function of banking involves accepting deposits, which are usually short-term, and funding loans, which generally have longer maturities. Maturity transformation is thus an inherent feature of financial intermediation and banks are strongly exposed to the associated risks. As a result, strategic management of assets and liabilities is crucial to optimise profitability, improve liquidity and protect the bank against various risks. Historically, regulatory frameworks, including the Basel I and II, placed a greater emphasis on the asset side of the balance sheet, focusing on credit risk management and capital adequacy. This focus arises from the belief that credit defaults and asset deterioration pose the main threats to a bank's solvency. Liquidity and funding risks, primarily stemming from liabilities, were largely viewed as an issue that banks could manage themselves without requiring any regulatory oversight and intervention.
The Global Financial Crisis (GFC) of 2008, during which banks faced vulnerabilities on both sides of the balance sheet, challenged this approach resulting in profound changes to the banking sector's regulatory framework. During the crisis, many banks experienced liquidity crisis leading to insolvencies despite adherence to capital requirements, highlighting the fragility of funding structures reliant on short-term liabilities. This underscored the systemic importance of liquidity management and the need for regulatory oversight beyond asset-side vulnerabilities. The policy response was a paradigm shift that led to prescribing comprehensive global liquidity standards viz. Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) which targeted short-term and medium-term liquidity resilience.