RBI defers proposed LCR norms implementation till at least March 31, 2026
Mumbai, Feb 7, 2025
"Trade-offs between stability and efficiency will be kept in mind"
In much-needed relief for banks regarding the impending implementation of the proposed liquidity coverage ratio (LCR) guidelines, which were to come into effect from April 1, Governor Sanjay Malhotra on Friday said that these regulations will not be enforced before March 31, 2026. Furthermore, this deadline is not a hard stop, as the Reserve Bank of India (RBI) aims to provide banks with ample time to ensure there is no disruption. Malhotra said the regulator will attempt to strike a balance between the cost and benefits of regulation.
“Less than two months is too short a window for the banks—we realise that. So, we will give time till at least March 31, 2026. It doesn’t mean it has to be March 31, 2026, but we will aspire for that. We want to make it very smooth, and it will also be phased. It will not be that all the regulations kick in from day one, which will, at the earliest, be March 31, 2026,” said Malhotra in a post-policy press conference.
Additionally, on expected credit loss (ECL) and project finance norms, Malhotra said, “ECL was only a discussion paper. Even the draft guidelines are not out. So, there is no time frame for the implementation of ECL guidelines,” adding that for project finance, banks will need more time.
“Moreover, they need to be seen in conjunction with each other. There is a certain amount of overlap between ECL and project finance. We will come out with something that balances the interest of the public, depositors, and financial stability, while also considering the concerns of the banks and keeping in mind the efficient use of resources,” he said.
According to the proposed LCR norms, issued in July 2024, banks have to assign an additional 5 per cent ‘run-off factor’ for retail deposits enabled with internet and mobile banking (IMB) facilities. A run-off factor refers to the percentage of deposits that a bank expects to be withdrawn during a short-term period of stress.
Current norms mandate banks to maintain a 100 per cent LCR. This means the stock of high-quality liquid assets (HQLA) should be at least equal to total net cash outflows. Banks had been requesting the RBI to defer the implementation of these norms and asked for them to be implemented in a phased manner, especially at a time when liquidity in the system has been tight.
“We have comments from stakeholders that there may be lower liquidity requirements for some of the other deposits. We are revising our impact analysis, and we will provide a time frame for when the LCR guidelines can be expected,” Malhotra said.
Separately, the draft project finance norms, issued in May 2024, require lenders to set aside 5 per cent of their standard assets or loans to cover losses during the construction phase of the project. The RBI’s discussion paper on ECL suggested that banks will have to recognise stress much earlier, in contrast to the existing regime in which they make provisions after losses are incurred.
Ashwini Kumar Tewari, managing director (MD), State Bank of India, said, “Banks had provided feedback to the RBI regarding the LCR norms. As of now, the decision to implement them from April 1 has been postponed. We will assess if the draft guidelines are revised based on our suggestions.
“Regarding the ECL norms, significant work, particularly related to IT systems, still needs to be done, which could take anywhere from six to 12 months. Additionally, we have communicated to the RBI about some overlap between the ECL and project finance norms. We will await further clarity from the RBI,” he added.
According to Suresh Ganapathy, MD, Macquarie Capital, the deferral gives banks a good amount of breathing space. “At the same time, the RBI governor isn’t rescinding any norms. All will be done, but with more relaxed timelines and phased implementation. So, it’s looking good for banks now, especially on the liquidity front in FY26E.”
“Governor’s commentary to allow banks sufficient time to adapt to new regulations, such as the LCR and project finance, will go a long way in smoothing the transitional impacts and is a step in the right direction,” said Uttam Tibrewal, executive director and deputy chief executive officer (CEO), AU Small Finance Bank.
Malhotra also highlighted that while financial stability is of paramount importance, the central bank is cognisant of the costs incurred by stakeholders in implementing the RBI’s guidelines to strengthen the financial system.
“The interest of the economy demands financial stability and consumer protection. Our mandate is to enhance both. At the same time, economic interest also warrants increasing efficiency, which is our duty as well. We recognise that just like there are no free lunches, regulation to enhance stability and consumer protection is not devoid of costs,” Malhotra said, adding that there are trade-offs between stability and efficiency, and the RBI will keep this trade-off in mind while formulating regulations.
“It will be our attempt to strike the right balance, keeping in view the benefits and costs of each regulation. I also want to reassure all stakeholders that we will continue the consultative process in regulation-making. The suggestions of stakeholders are valuable, and we will give serious consideration to them before taking any major decision,” Malhotra added.
[The Business Standard]
