RBI’s draft LCR norms to increase SLR demand, lowers NIMs

Banks

The proposed draft norms of the Reserve Bank of India (RBI) related to the liquidity coverage ratio (LCR) is expected to increase the demand for the Statutory Liquidity Ratio (SLR) and lower net interest margins (NIM), according to the brokerage firms.

This is because, as per the proposed norms, the requirement of banks higher quality liquid assets will increase to shore up their LCR, and hence the demand for government securities in the market will increase.

“We expect tighter LCR norms to have following implications for the banks such as increase in 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.

Further, Motilal Oswal said in a report that draft guidelines from the RBI are proactive steps towards strengthening the liquidity framework of banks in India.

Motilal Oswal's report added that by increasing the run-off factors for digital banking deposits and ensuring accurate valuation of HQLA, these measures aim to enhance the overall liquidity resilience of banks, ensuring they are better prepared to manage risks in the evolving financial landscape.

The RBI on July 25 released draft circular on the Basel III framework on liquidity standards, which was announced to be issued in the April monetary policy.

RBI said banks covered under Liquidity Coverage Ratio (LCR) framework are required to maintain a stock of high quality liquid assets (HQLA) to cover the expected net cash outflows in the next 30 calendar days. However, the recent episodes in some jurisdictions have demonstrated the increased ability of the depositors to quickly withdraw or transfer deposits during times of stress, using digital banking channels.

Such emerging risks may require a revisit of certain assumptions under LCR framework. Therefore, certain modifications to the LCR framework are being proposed towards facilitating better management of liquidity risk by the banks, central bank said.

The central bank reviewed LCR framework for banks in India and decided that banks shall assign an additional five percent run-off factor for retail deposits which are enabled with internet and mobile banking facilities (IMB) i.e., stable retail deposits enabled with IMB shall have 10 percent run-off factor and less stable deposits enabled with IMB shall have 15 percent run-off factor.

Unsecured wholesale funding provided by non-financial small business customers should be treated in accordance with the treatment of retail deposits, the draft circular said.

Level 1 HQLA in the form of Government securities should be valued at an amount not greater than their current market value, adjusted for applicable haircuts in line with the margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF), according to the circular.

The RBI said in case a deposit, hitherto excluded from LCR computation (for instance, a non-callable fixed deposit), is contractually pledged as collateral to a bank to secure a credit facility or loan, such deposit shall be treated as callable for LCR purposes.

An IIFL Securities report also said that the draft norms could lower the banks LCR ratio by 12-18 percent from the current levels.

"Within our coverage universe, Federal Bank, IDFC First Bank, and AU SFB among the PVBs have relatively lower LCRs, while Bank of Baroda among the PSBs has a lower LCR ratio. Generally, PSBs seem to be in a better position as most have reasonably higher LCRs compared to PVBs. However, PSBs hold a larger share of retail deposits, which might somewhat offset this advantage,:" Motilal Oswal said.