Oman's central bank asks banks to strengthen non-volatile sources of funds

Muscat: Oman’s central bank has asked commercial banks to strengthen its non-volatile sources of funding in line with Basel 3 norms in an attempt to avoid risk arising from hardening interest rates at times of instability in financial markets.
In a guideline to commercial banks, the apex bank said that banks’ liquidity coverage ratio (LCR), which became effective in January 2015, has to be a minimum ratio of 60 per cent, and has to be increased by 10 per cent every year thereafter till it reaches a minimum of 100 per cent by 2019. This ratio, which is an important part of Basel norms, determines how much liquidity assets banks have to maintain and is calculated after giving different weightages to various types of deposits held by banks. Deposits from corporates, which are of highly volatile in nature, are given less or zero weightage, while retail deposits (which are generally less volatile) are considered as strong components in calculating LCR.
The liquidity coverage ratio is calculated by dividing highly liquid deposits with net cash outflows over the next 30 days, which helps in overcoming stress tests among banks. This will contribute to financial stability by enhancing the ability of banks to withstand periods of economic and financial stress.
The Central Bank of Oman (CBO) guideline to banks also said that the standard for net stable funding ratio (NSFR) has to be minimum ratio of 100 per cent and will become effective from January 1 2018. This is also in line with the guidelines issues by the Basel Committee on Banking Supervision (Basel 3). This ratio ensures that long-term assets of banks are funded by long-term and stable funding sources. Sometimes banks offer long-term loans with short-term deposits, in an attempt to get good margins, which may lead to asset-liability mismatch.
In fact, the central bank’s measures are expected to affect the profitability of Omani banks as long-term funding cost is relatively on the higher side. “It is also a challenge for banks to get sufficient long-term deposits. The capital and financial markets in Oman is still in developing phase. There are only limited ways in which banks can get long-term funds – term papers, private placement and bonds,” said a senior banker, who does not want to be named.