The Reserve Bank of India (RBI) has issued draft guidelines for banks concerning the Liquidity Coverage Ratio (LCR). These guidelines mandate banks to maintain a higher stock of liquid securities as a buffer against potential withdrawals. The new regulations are set to take effect on April 1, 2025.
Context and Rationale
- Technological Impact on Withdrawals: With the advent of mobile and internet banking, customers can now withdraw substantial amounts with just a click. This contrasts sharply with the older system, where withdrawals required physical branch visits and paperwork.
- RBI’s Concern: The RBI has noted that while technology facilitates instant transactions, it also introduces risks that require proactive management.
New LCR Requirements
- Increased Run-Off Factors: Banks are required to assign an additional 5% run-off factor for retail deposits accessible through internet and mobile banking (IMB). This means:
- Stable retail deposits with IMB will have a 10% run-off factor.
- Less stable deposits with IMB will have a 15% run-off factor.
- Unsecured Wholesale Funding: Unsecured wholesale funding from non-financial small business customers must be treated similarly to retail deposits.
Implications for Banks
- Risk Management: The RBI’s guidelines aim to enhance banks’ liquidity resilience, given the rapid changes in technology and its potential to cause sudden deposit withdrawals.
- Potential Impact: Analysts have predicted several effects of these new guidelines:
- Increased Liquidity Requirement: An increase in the run-off factor by 5% would raise the deposit need and liquidity requirement of banks.
- Core Earnings Impact: Changes could affect core earnings, with potential impacts on net interest margins (NIM), return on assets (RoA), and profit after tax (PAT).
Analyst Perspectives
- Gaurav Jani, Prabhudas Lilladher: The increase in the run-off factor could translate to higher liquidity requirements, potentially affecting core earnings for FY26. Banks with a higher share of retail deposits, higher loan yields, and lower NIMs/RoA may experience more significant impacts.
- IIFL Securities Report: Anticipates implications such as higher statutory liquidity ratio (SLR) demand, reduced loan-to-deposit ratios, increased competition for retail deposits, and potential declines in NIMs and government securities (G-Sec) bond yields.
Multiple-Choice Questions (MCQs):
- When will the new RBI guidelines on the Liquidity Coverage Ratio (LCR) come into effect?
- A) April 1, 2024
- B) April 1, 2025
- C) July 1, 2025
- D) January 1, 2026
- What additional run-off factor will banks need to assign for stable retail deposits enabled with internet and mobile banking (IMB)?
- A) 5%
- B) 10%
- C) 15%
- D) 20%
- According to Gaurav Jani, what could be the impact of the new LCR guidelines on core earnings for FY26?
- A) Increase in net interest margins
- B) Decrease in net interest margins and core return on assets
- C) No impact on core earnings
- D) Increase in profit after tax
- Which type of deposit does the RBI require to be treated similarly to retail deposits under the new LCR guidelines?
- A) Secured wholesale funding
- B) Unsecured wholesale funding from non-financial small business customers
- C) Government bonds
- D) Corporate deposits
- What potential effect of the new LCR norms was mentioned by IIFL Securities?
- A) Increased government bond yields
- B) Decreased competition for retail deposits
- C) Lower asset yields and reduced loan-to-deposit ratios
- D) Increased deposit interest rates and higher core earnings