'LCR transition to impact banks' profitability, loan growth'

The introduction to liquidity coverage ratio (LCR) is a positive step for banks but the transition will be costly and is likely to impact profitability and credit growth of the lenders, India Rating and Research said today.
"The introduction of liquidity coverage ratio (LCR) is a positive step for the banking sector, but it could come at a high transition cost for some banks," the rating agency said in a report.
Any short-term liquidity crunch could lead to solvency issues with banks that do not have contingent liquidity plans in place, it added.
The RBI, last year, had said the LCR would be binding on banks from January 1, 2015.

With a view to provide a transition time for banks, the LCR requirement would be minimum 60 per cent with effect from January 1, 2015 and rise in equal steps to reach 100 per cent on January 1, 2019, RBI had said.
LCR is measured as the weighted high-quality liquid assets (HQLA) over a bank's weighted net cash outflows (NCOF) with a residual maturity of 30 days.

The reported yearly ratios are monthly averages recorded by banks, the median of which stood at 101.5 per cent for the country's banks as of March 2015 as against the required regulatory minimum by the RBI at 60 per cent.

"While most banks are comfortably placed, some names from the public and private sectors barely met the regulatory requirements in March 2015," the report said.
Banks can achieve their LCR ratios above 100 per cent by March 2019 by reducing outflows from the liability side by garnering more stable deposits (such as those from retail and SME clients and any non-callable deposits, which have lower runoff rates).
Lenders can also increase the asset side HQLA component (cash in hand, excess cash reserve ratio (CRR) and excess statutory liquidity ratio (SLR) securities) which comes with its own drag on margins, to achieve the target.

However, improvements on the liability side may take time to materialise depending upon the pace of retail deposit accretion, it said.
"This would necessarily be a drag on their profitability
owing to low yielding SLR securities replacing high yielding advances," it said.
The HQLA component comprises primarily excess SLR and CRR requirements for banks, along with the securities allowed under the marginal standing facility and the facility to avail liquidity for LCR (a maximum of 5 per cent of NDTL).
These measures make up 90-95 per cent of the reported HQLA number in most banks.
"If RBI does not increase the facility to avail liquidity for LCR from the current level of 5 per cent, banks will need to increase their excess SLR or CRR to shore up their LCRs.

"This could hamper funds that were previously available for credit growth, reducing banks' profitability," the report said.
Banks with below 100 per cent LCR would need, on an average, to increase HQLA to the tune of 4 per cent of the total FY15 assets or 4.5 per cent of NDTL.
This ranges as high as 8 per cent for some banks and would imply that some banks would need to raise SLR levels to above 30 per cent.
"This would imply a return on assets impact of 6-8 basis points till FY19," the rating agency said.