MC Exclusive| Banks said to request RBI to defer implementation of LCR norms

Reserve Bank of India

India’s banks, both state-owned and private, have requested the Reserve Bank of India (RBI) to defer the implementation of liquidity coverage ratio (LCR) norms to the later part of the next financial year,2025-26,  four people familiar with the development told Moneycontrol. As per the current timeline, these norms will come into force from April 1,2025.

This request was made by bank chiefs when they met the new governor of the BRI, Sanjay Malhotra, earlier this week.

“The request to defer implementation of the norms were made at the informal interaction with some of us at the meeting,” a bank chief told Moneycontrol on condition of anonymity.

Another bank CEO said that the request for deferment of implementation was because of the tight liquidity conditions currently prevailing in the banking system. Bankers are said to have told the RBI governor that if the LCR norms were to take effect while liquidity remained at current levels, it could hit banks badly in FY26.

The proposed LCR rules, issued in July 2024, call for banks to assign an additional 5 percent ‘run-off factor’ for retail deposits that are enabled with internet and mobile banking (IMB) facilities.

As per RBI, retail deposits are divided into two categories called stable and less stable deposits. Under both categories, there are two sub-categories, deposits with IMB and deposit without IMB.

Stable retail deposits enabled through the IMB route shall have 10 percent run-off factor and less stable deposits enabled via IMB shall have 15 percent run-off factor in retail deposits.

According to the RBI, stable deposits are insured deposits (to the extent covered by the Deposit Insurance and Credit Guarantee Corporation in transactional accounts where salaries/pensions are automatically deposited or are paid out from or relationship-based accounts (for instance, the account holder has another relationship with the bank, say, a loan).

Bankers say that with system-level lending already taking a hit in the recent quarter due to tightening of credit underwriting norms, partly owing to the regulatory changes that have been enforced since November 2023 and also due go garnering more deposits continuing to be a challenge, implementing LCR norms could further restrict the loan growth of banks.

An email sent to the RBI seeking comments on the matter remained unanswered at the time of publishing this story.

During the meeting earlier this week, the RBI's Malhotra acknowledged the important role played by the banks in building resilience of the domestic financial system while highlighting some of the main vulnerabilities present globally that can pose downside risks.

Malhotra urged banks to continue on the path to financial stability, deepening financial inclusion, improving digital literacy, enhancing availability and affordability of credit, strengthening customer service and grievance redressal mechanism, and continuing to invest in technology, as per a press release from the central bank.

Apart from the run-off factor, the draft norms—set to be finalised after a review by Malhotra—require banks to maintain a stock of high-quality liquid assets to cover the expected net cash outflows over the next 30 calendar days. For the purpose of LCR, unsecured wholesale funding provided by non-financial small business customers are also to be treated as retail deposits.