RBI to Review Impact of Stricter LCR Norms on Banks’ Liquidity and Lending

The Reserve Bank of India (RBI) has asked commercial banks to evaluate how new changes to the Liquidity Coverage Ratio (LCR) norms could affect their operations. This comes after concerns from banks about the stricter regulations, according to reports.

Draft Norms Under Review

The RBI is reviewing draft norms that are expected to come into effect on April 1, following approval by Governor Sanjay Malhotra. The new rules will require banks to hold more high-quality liquid assets (HQLAs), which could reduce their ability to lend. HQLAs help banks manage sudden liquidity needs during disruptions.

Reason Behind the Proposed Changes

The new LCR regulations aim to address risks like large online withdrawals inspired by events such as the collapse of Silicon Valley Bank in 2023. Banks have raised concerns with the finance ministry that these stricter norms could impact their lending capacity.

Impact on System Liquidity

The RBI has asked large commercial banks to assess the impact of the new LCR norms compared to the current system. This exercise is aimed at understanding how the proposed changes could affect overall liquidity in the banking system.

Banks May Need Significant Investment in Government Securities

If the new LCR norms are enforced without changes, banks might have to purchase ₹4-6 trillion in government securities to meet the requirements. These securities are used as HQLAs to manage liquidity in case of a crisis.

Currently, only government securities qualify as HQLAs, and the RBI has consistently rejected proposals to include the Cash Reserve Ratio (CRR) as part of these assets. This means banks will have to divert ₹4-6 trillion into government bonds, which could limit their ability to lend to businesses and individuals.

Proposed Changes to the LCR

The RBI’s draft guidelines, released in July, suggest increasing the “run-off” factor for retail deposits accessed via internet and mobile banking (IMB). The run-off factor for stable IMB deposits would rise from 5% to 10% and for less stable IMB deposits, from 10% to 15%.

Industry Concerns

Banks have requested the finance ministry to relax or delay these guidelines, fearing negative effects on credit growth. Economists have pointed out that current economic conditions, like low growth, tight liquidity, and currency depreciation, are different from when the draft rules were first proposed.

A senior economist warned that if these norms are implemented as planned, they could severely impact the banking system. More commentary on the matter is expected during the RBI’s monetary policy announcement on February 7.

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