MUMBAI: RBI Deputy Governor M Rajeshwar Rao cautioned financial institutions against excessive reliance on the central bank’s lender of last resort (LOLR) function, emphasising the importance of maintaining a balanced and diverse funding sources.
Speaking at the Mint BFSI Summit, Rao underscored that the LOLR function is designed as a safeguard for the financial system and should not be treated as a routine contingency mechanism.
He highlighted the risks associated with overdependence on wholesale funding or short-term instruments like Certificates of Deposit (CDs), as these could strain net interest margins and exacerbate structural liquidity challenges.
Needed robust ALM
Instead, financial institutions must prioritise robust asset-liability management (ALM) practices, stress testing, and contingency funding plans to ensure resilience.
“Judicious use of public funds through the LOLR function aims to protect the financial system as a whole and avoid moral hazards for individual entities,” Rao remarked.
He urged institutions to align their funding strategies with sustainable deposit growth rather than leaning disproportionately on short-term borrowing, which could jeopardize long-term stability.
Rao also called for adherence to liquidity coverage ratios (LCR) and a re-evaluation of funding strategies amid the widening gap between deposit and credit growth, particularly for NBFCs. A diversified funding mix, he noted, is key to preserving financial stability and weathering liquidity pressures.
