The Reserve Bank of India (RBI) last week issued the draft guidelines for banks on the Liquidity Coverage Ratio (LCR), essentially asking them to set aside higher stock of liquid securities as a buffer on deposits to offset any potential threat from unexpected withdrawals by depositors using the ease of technology. The new norms will be effective from April 1, 2025.
First of all, what is the context of this new rule?
This is important to understand. In simple words, the RBI is a bit worried that in the new era of fast-paced technology (mobile, internet banking), customers can withdraw massive amount of deposits just at a click. This is unlike the old days when the withdrawal of deposits was a fairly long process involving branch visits and filling up of forms.
In RBI’s own words, banking has undergone rapid transformation in recent years. “While increased usage of technology has facilitated the ability to make instantaneous bank transfers and withdrawals, it has also led to a concomitant increase in risks, requiring proactive management.”
It is in this context that the RBI reviewed the LCR framework for banks basically to further enhance their liquidity resilience.
What does it mean for banks? What the RBI has now said is this: “Banks shall assign an additional 5 percent run-off factor for retail deposits which are enabled with internet and mobile banking facilities. In other words, stable retail deposits enabled with IMB shall have 10 percent run-off factor and less stable deposits enabled with IMB shall have a 15 percent run-off factor.”
To set the technicalities aside, the RBI is asking banks to be careful on those deposits which are enabled with the ease of technology because it can potentially vanish at any point in time.
At least that’s the sense I got when I first saw this draft circular. Also, the RBI has said unsecured wholesale funding provided by non-financial small business customers needs to be treated in accordance with the treatment of retail deposits in the same way.
Technology is like Bhasmasura! It gives big power but can also self-destruct if let loose. The same RBI, which nudges the banks to embrace technology, is now worried that the same technology may cause a run on the bank deposits. This would give some more pain to banks already struggling to raise deposits and fighting a high credit-deposit ratio. Of late, banks have seen higher credit growth much faster than the deposits growth which has caused a divide.
And, what do analysts think about this?
Banking analysts have warned that the latest RBI rules will have some impact on banks. According to Gaurav Jani , research analyst at Prabhudas Lilladher, the Increase in run-off factor by 5 percent would effectively increase the deposit need and liquidity requirement of 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 Jani’s calculations, the change could impact the core earnings for FY26 since the implementation is from April 1. “As per our calculations, the NIM effect would be 7-10bps, core RoA could be shaved off by 6-9bps and core PAT could be hit by 3 percent to 7 percent. Hence, large private banks like ICICI Bank and Kotak Mahindra would see the least impact, followed by HDFC Bank and Axis Bank. IndusInd Bank, PSU banks, and select mid-cap banks could see a higher impact, given lower the NIM and a weak RoA,” he said.
Jani's views found an echo in his peer group. “We expect tighter LCR norms to have implications such as higher SLR demand and a reduction loan-to-deposit ratio, lower asset yield, increase in retail deposit competition and deposit interest rates, lower NIMs, and lower G-Sec bond yields,” IIFL securities said in a report.
To sum it up, the latest RBI rules are likely to add to the woes of banks that are grappling with a deposit crisis.
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