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.

Understanding the Liquidity Coverage Ratio (LCR)

Key Concepts

Purpose: Introduced as part of Basel III reforms post-2008 financial crisis.
Definition: Measures the proportion of high-quality liquid assets (HQLA) that banks hold.

Requirements

Coverage: Banks must maintain HQLA to cover 30 days’ net outflow under stressed conditions.
Minimum LCR: Set at 100% since January 1, 2019.
HQLA: Includes cash, short-term bonds, excess SLR, MSF assets, and FALLCR (15% of deposits since April 1, 2020).

Current Status:

Scheduled Commercial Banks maintain an LCR of 131.4%, well above the 100% requirement.

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