RBI’s Tightened LCR Norms Pose Challenges for Banks

The Reserve Bank of India (RBI) has proposed stricter liquidity coverage ratio (LCR) norms to mitigate the risk of bank runs, particularly those triggered by digital banking channels. This move aims to bolster the banking system’s resilience against sudden deposit withdrawals.

LCR mandates banks to maintain a certain proportion of high-quality liquid assets (HQLA) to cover potential short-term cash outflows. The central bank’s new guidelines introduce a higher run-off factor for retail deposits made through Internet and mobile banking (IMB), reflecting the perception of increased liquidity risk associated with these channels.

To comply with the revised norms, banks will need to hold a larger quantum of HQLA, primarily government securities. This could potentially reduce lending activities as banks divert funds to meet the stricter liquidity requirements. Furthermore, the increased demand for government securities could exert upward pressure on bond yields.

The proposed changes come as the banking sector is already grappling with a widening gap between credit and deposit growth. With credit expanding at a faster pace than deposits, banks may face challenges in adhering to the new LCR norms without compromising lending activities.

Industry experts believe that implementing these norms could necessitate a significant increase in banks’ holdings of government securities, potentially reaching up to 30% of deposits. This could impact banks’ overall cost of funds and, consequently, lending rates.

The banking industry is expected to engage in detailed discussions with the RBI to address concerns and explore potential modifications to the proposed guidelines.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.