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RBI’s proposed LCR norms to dampen the market

Submitted by admin on July 29th, 2024

The proposed norms on LCR could thus be a dampener for some banks there as outlined by RBI, according to our research, bankrupted banks could also be a probable result of the implementation of these regulations.

The RBI seems to be a bit concerned that in the new changed environment – Technologies: Mobile, Internet Banking the customers can withdraw huge amount of deposits at the click of the button.

The Reserve Bank of India (RBI) last week released the draft guidelines for the banks on the Liquidity Coverage Ratio (LCR), which in effect has told the banks to keep proportionately higher stock of liquid securities, which will act as a buffer against any threat emanating from potential withdrawal by the depositors using the technological advancement. The new norms will come into force from the financial year started from April 1 , 2025.

First of all, let us discuss the situation or the conditions that lead to appearance of this new rule.
This one is significant to grasp. In other words, the RBI appears slightly concerned that in the age of advanced technological applications like mobile and internet banking the customers can transfer huge amounts of deposits in a click. This is unlike the old-style procedure where withdrawal of deposits used to take a fairly long time, where you would visit the branch and complete forms among others.

Quoting RBI words directly, it would be possible to state that banking has expanded and developed rather actively in recent years. “As age-old problems like bank transactions and withdrawals have transitioned into prompt with the help of technology, so have the risk factors moved proportionately in tandem, hence are are is to be tackled anew.”

Facilitating this process, the RBI has reassessed the LCR framework for banks primarily to strengthen the stability of bank’s liquidity, inter alia.

What implication for the banking industry?

What the RBI has now said is this: It further stated that “Banks shall provide an extra 5% run-off factor to the retail deposits which are enabled with internet and /or mobile banking facilities In other words, the retail deposit which is stable and has internet and mobile banking facilities shall have run-off factor of 10% whereas the less stable deposits having IMB facilities shall have a run off factor of 15%.

Assuming the technicalities out of the picture, the RBI is seeking the banks to be cautious with those deposits that come with the convenience of the technology as they warned that they can disappear at any given time.

But at least that is what some of them must have thought, going by this draft circular I came across. Also the RBI stated that non-secured wholesale funding coming from non financial sbs (small business customers) has to be treated in the same way as treating the retail deposit.

Technology is like Bhasmasura! It provides very powerful results but it is a dangerous cycle that can be set to self-destruct if not controlled. That same RBI, which encourages the banks to move towards technology, itself fears that the same technology will lead to a rush out of the bank deposits. This would have provided little more pain to those banks which are finding it hard to mobilize deposits and are in a vivid corner with a high credit deposit ratio. Recently, there has been separated credit growth which is observed at the rate much higher than the deposits growth among banks.

What do analysts have to say about this?

In the recent past the RBI has come out with some new guidelines which will be detrimental to Banks to some extent, the Banking Analysts have pointed out. Gaurav Jani who works as a research analyst at Prabhudas Lilladher added that the proposed Increase in the ‘run-off ‘ factor by 5 percent would actually Increase the deposit need and the liquidity requirement of the banks.

“Basis our calculations across banks, 5 percent of retail deposits as per LCR would roughly equate to 3-4 percent of loans which would be set aside towards liquidity. Banks having higher share of retail deposits as per LCR, higher loan yields and lower NIM/core RoA would be more affected,” he said.

As per the Jani estimations the change may affect the core earning for the FY26 as the implementation is from April 1st. Currently it suggests that large private sector banks such as ICICI Bank & Kotak Mahindra would be least affected, next comes HDFC Bank & Axis Bank, while IndusInd Bank, PSU banks & few mid-small cap banks appear to be most vulnerable due to lower value of NIM & ‘weak’ RoA, he said.

The aforesaid sentiments of Jani was audible to his fellows also. “We believe the tighter LCR norms will result in outcomes like higher SLR demand, lower loan-to-deposit ratio, lower asset yield, more competition in the retails space especially on deposit rates and hence, higher deposit interest rates, lower NIMs and finally lower G-Sec bond yields,” business advisory company IIFL securities said in a research note.

In sum, the new regulations have recently introduced by the RBI, are going to put more pressure on the banks which are already going through the turbulent phase the deposit crisis.
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