RBI's New Liquidity Guidelines May Slow Bank Credit Growth

The Reserve Bank of India's new guidelines require banks to increase their liquidity coverage ratio (LCR), accounting for potential digital deposit outflows. This move, to prepare banks for sudden withdrawals, could slow credit growth by mandating higher liquid asset reserves.

The Reserve Bank of India (RBI) has issued a draft circular with new guidelines for banks' liquidity coverage ratio (LCR), which could slow down credit growth.

Higher Liquid Assets

  • Banks must set aside more liquid assets to prepare for sudden withdrawals, similar to a bank run.

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Digital Deposits

  • Banks must account for the potential outflow of digital deposits when calculating LCR. Currently, banks are required to maintain an LCR of 100%.

New Run-Off Factors

  • For deposits made through internet and mobile banking (IMB), the run-off factor increases to 10% from 5%. Less stable deposits will have a 15% run-off factor.

Haircuts on Assets

  • Banks must apply relevant haircuts on assets while calculating LCR.

Conservative Move

  • Bankers view this as a conservative step, forcing banks to invest more in government securities and potentially slow credit growth.

Tight Liquidity

  • With tight system liquidity and slow deposit mobilization, banks may need to keep deposit rates high and slow growth to align with funding.

LCR Reduction

  • System LCR has already declined by 12 percentage points to 135% over the past year due to strong credit demand.

Expert Opinions

  • Sumant Kathpalia (IndusInd Bank): Impact on LCR will be around 4-5%. The bank is currently at 122% LCR and comfortable with the new guidelines.
  • Madhavi Arora (Emkay Global Research): LCR could reduce by 8-11% for large private banks and 12-19% if a high percentage of deposits are linked to IMB.
  • Suresh Ganapathy (Macquarie Capital): LCR impact could be 16-20%, dropping below internal thresholds for many private banks.

Strategic Adjustments

  • Focus on Branch Banking: Banks may shift focus back to branch banking and mobilize more non-callable deposits.
  • Higher Lending Rates: Banks may keep lending rates higher to offset the cost of carrying additional liquidity.

Specific Impacts

  • Federal Bank: LCR could fall from 113% to 95%.
  • IndusInd Bank: LCR could drop from 118% to 107%.
  • HDFC Bank: LCR might decrease from 123% to 109%.
  • ICICI Bank: LCR could reduce from 121% to 108%.

These draft guidelines are expected to be implemented from April 1, 2025.