RBI directs banks to assess impact of new LCR norms on liquidity, lending
New Delhi, Jan 24, 2025
The RBI has asked banks to assess the impact of stricter liquidity coverage ratio norms, aimed at system stability but raising concerns over reduced lending capacity
The Reserve Bank of India (RBI) has requested commercial banks to provide data on how the proposed changes to liquidity coverage ratio (LCR) norms could affect them, following concerns from lenders about stricter regulations, according to a report by The Economic Times.
Draft norms under review
The draft norms, set to be finalised after a review by Governor Sanjay Malhotra, who succeeded Shaktikanta Das on December 9, are expected to take effect from April 1. These rules will require banks to hold a higher portion of high-quality liquid assets (HQLAs), which could limit their lending capacity. HQLAs are typically used to manage sudden liquidity demands during disruptions, the report said.
The proposed regulations aim to address risks associated with significant online withdrawals, inspired by incidents such as the collapse of Silicon Valley Bank in 2023. Banks have previously expressed concerns to the finance ministry, stating that the new norms might hinder their ability to provide credit.
Assessment of impact on system liquidity
The RBI has asked large commercial banks to submit assessments of the impact of the new LCR norms compared to the current framework, sources cited in the report said.
The report quoted a banker as saying that the exercise is likely intended to evaluate the effect on system-wide liquidity after implementing the proposed norms.
Significant investment in government securities
Estimates suggest that banks may need to purchase Rs 4-6 trillion worth of government securities to comply with the enhanced LCR norms if implemented without revisions. The draft proposes a higher “run-off” factor to mitigate risks of deposit withdrawals during a crisis.
The run-off factor represents the percentage of deposits that could be withdrawn in a stress scenario. LCR requires banks to maintain sufficient HQLAs, primarily government securities, to manage a hypothetical 30-day liquidity crunch.
Currently, only government securities qualify as HQLAs, as the RBI has consistently rejected proposals to include the cash reserve ratio (CRR) as such assets. CRR, which mandates banks to keep a percentage of deposits aside, stands at 4 per cent, the report said.
The report quoted a senior treasury executive at a leading bank as saying that this effectively means Rs 4-6 trillion will be diverted towards investments in government bonds rather than being lent to businesses and individuals.
Proposed changes
The RBI’s draft guidelines issued in July suggest an additional 5 per cent run-off factor for retail deposits accessible via internet and mobile banking (IMB). This would increase the run-off factor for stable and less stable IMB-enabled deposits to 10 per cent and 15 per cent, respectively, from the current 5 per cent and 10 per cent, the report mentioned.
Industry concerns
Banks have urged the finance ministry to seek relaxation or deferment of the guidelines, citing potential adverse effects on credit growth. Economists have noted that current economic conditions, including low growth, tight liquidity (Rs 1.75 trillion deficit on average), and a 3 per cent rupee depreciation since November, differ significantly from when the draft rules were proposed.
The report quoted a private bank treasury head as saying that LCR norms are formulated with a long-term view of ensuring systemic stability and should not be swayed by cyclical conditions like tight liquidity or slow growth.
If implemented in the current form, the guidelines could deliver a “major negative shock” to the banking system, warned a senior economist at a foreign bank. Further commentary on the matter is anticipated during the RBI’s monetary policy announcement on February 7, the report said.
[The Business Standard]
