RBI's tighter liquidity norms credit positive for banks: Moody's

The central bank released a set of preliminary guidelines last month, including suggesting that banks will be required to allocate an additional 5% reduction in the stability of retail deposits that have internet and mobile banking access

The Reserve Bank of India’s latest draft guidelines aimed at enhancing banks’ ability to manage liquidity in the face of increasing digital transactions is credit positive, ratings agency Moody’s said on Thursday.

The central bank released a set of preliminary guidelines last month, including suggesting that banks will be required to allocate an additional 5% reduction in the stability of retail deposits that have internet and mobile banking access.

The guidelines will however, lead to a fall of around 15 percentage points in banks’ liquidity coverage ratios (LCR), Moody’s added.

LCR is a liquidity requirement for banks to maintain a certain proportion of high-quality liquid assets including cash, reserves with central banks, and federal government bonds, which can easily be converted into cash whenever needed.

The proposed tighter liquidity norms are credit positive because they will help improve banks’ resilience against unexpected outflows of depositors, and improve liquidity buffers, Moody’s said.

”At the system level, retail and small business deposits make up around two thirds of total deposits and we expect more than 50% are IMB (internet and mobile banking)-enabled,” the rating agency said.

The extent of reduction in LCR will depend on the proportion of retail and small business deposits that are enabled with IMB facilities, it added.

State-run lender Bank of Baroda expects its liquidity coverage ratio to fall by 12-15 percentage points from current 138%, its CEO told Reuters on Thursday.

”We expect banks to taper credit growth ahead of the measure’s proposed implementation on April 1 next year, which will improve their credit to deposit ratios,” Moody’s said.