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RBI’S LIQUIDITY NORMS AND POTENTIAL IMPACT ON CREDIT GROWTH

Why in the News?

• The Reserve Bank of India (RBI) has introduced new guidelines requiring banks to hold a higher stock of liquid assets to address potential bank runs.
• The guidelines focus on deposits made through digital channels, which are considered less stable and prone to quick withdrawals.

Source: BS

Key Provisions and Requirements

• Banks must maintain a Liquidity Coverage Ratio (LCR) of 100%, holding high-quality liquid assets (HQLA) like government securities.
• New rules mandate higher liquidity for digital deposits, increasing the run-off factor to 10% for stable retail deposits and 15% for less stable deposits via internet and mobile banking.
• Banks are also required to apply relevant haircuts on assets while calculating the LCR.

Potential Impacts and Industry Response

• The guidelines are seen as conservative, potentially forcing banks to invest more in government securities and slow credit growth.
• Banks might need to keep deposit rates elevated and temper growth to align with the new funding requirements.
• Analysts predict an 8-11% reduction in banks’ LCR, assuming varying levels of deposit linkage to internet and mobile banking, with moderate impacts on mid-cap banks and public sector banks.