Banks must plan to avoid run on deposits: Crisil

The recent scare on ICICI Bank’s deposit front is an eye-opener to the manner in which private sector banks manage cash.Credit Rating a...

The recent scare on ICICI Bank’s deposit front is an eye-opener to the manner in which private sector banks manage cash.

Credit Rating and Information Services of India (Crisil) is of the view that these banks need to vary their sources of liquidity to manage and tide over such scares.

Crisil also makes the critical observation that technology by providing additional networked channels, has increased the speed and impact of the withdrawal rush. ‘‘This has greatly increased the complexity of the logistical issues of cash management and the need for banks to react faster to

able to minimise the impact of such events,’’ notes Crisil.

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What Crisil is saying on the reserves is straightforward. To the extent that these genre of banks maintain cash reserve ratio (CRR) and statutory liquidity ratio (SLR) only to the extent of the stipulated norms — that is hardly in excess of what is required — a crisis on the deposit front tends is aggravated.

‘‘Immediate sources of liquidity include the CRR and excess cash balances, securities for maintaining SLR, and excess liquid securities, and cash vaults at various locations. Non-government banks need to pay greater attention to maintaining varied sources of liquidity as compared to state-owned banks. Crisil notes that it is not a general practice for these banks to maintain excess CRR and SLR balances,’’ says Crisil.

Bank deposits are highly confidence sensitive and triggers for a sudden large-scale loss of depositor confidence are hard to predict. ‘‘Once a run on deposits begins, the quality of the immediate response of the both the bank’s management and the regulator, centrally determines the magnitude and impact of the episode,’’ says Crisil’s executive director and chief rating officer Roopa Kudva.

The rating agency cites availability of varied sources of liquidity, nature of support system, logistics of cash management over large networks, and the communication strategy as the key issues in managing a run on deposits. In this regard, it makes a mention of ICICI Bank’s media strategy of highlighting its financial soundness, and earlier as in the case of Global Trust Bank, of providing contigency liquidity lines to banks.