Draft guidelines may impact banks' existing LCR by upto 300 pps: CRISIL

Last week, RBI proposed to tighten norms related to liquidity coverage ratio by increasing the run-off factor to 5 per cent for retail deposits

The Reserve Bank of India’s (RBI’s) proposal to revise the liquidity coverage ratio (LCR) is expected to drag the LCRs of banks by 10-300 percentage points (pps), according to a study by CRISIL Ratings.

Last week, RBI proposed to tighten norms related to LCR by increasing the run-off factor to 5 per cent for retail deposits. Run-offs occur when individuals or businesses withdraw their deposits unexpectedly. Stable retail deposits enabled with Internet and Mobile Banking (IMB) are proposed to have a 10 per cent run-off factor, and less stable deposits will have a 15 per cent run-off factor.

As per a study conducted by CRISIL on 31 banks (public sector and private), the new norms will augment the resilience of banks against unpredicted outflows of deposits; however, implementation in the present format will also cause a decline in currently reported LCRs. Additionally, the credit growth and net interest margin (NIM) of the lenders are also likely to be impacted in the near term due to this measure.

 

Ajit Velonie, Senior Director, CRISIL Ratings, said, “Compared with the past, and given the rising penetration of digital banking, the risk of sudden, large withdrawals during stress is higher now, thus putting pressure on liquidity. We saw instances of this last year in other geographies. The RBI’s proposed guidelines aim to increase the buffer to enable banks to tackle such emerging risks. However, this revision will have an impact on current reported LCRs of many banks. The median LCR of the banks analysed, which stood at 136 per cent as of March 31, 2024, would drop to 117 per cent if the guideline is implemented as is.”

Currently, banks are grappling with growth in deposits slowing as compared to improvement in credit. As per analysts at CRISIL, the gap between credit and deposits narrowed to Rs 300 bps in FY24 as compared to a gap of 600 bps in FY23.

However, in the initial few months of FY25, the gap is widening to nearly 400 bps with several banks dipping into their excess statutory liquidity ratio (SLR) holdings to meet their liquidity requirements. The LCRs of many banks have already been impacted by a reduction of more than 250 basis points (bps) between FY23 and FY24.