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.
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.
