RBI's Softer LCR Norms To Boost Banking Sector Credit Growth

The Reserve Bank of India's decision to go softer on the final liquidity coverage ratio norms from the previous stringent draft guidelines will boost bank credit growth by 100-150 basis points, four people told NDTV Profit.

Banks will have additional liquidity which they can deploy into loan assets, all of the four people quoted above said.

"As per our estimates, a benefit of 6% on LCR will be able to release HQLA (high-quality liquid assets) of Rs 2.5-3 lakh crore," Neeraj Gambhir, Group Executive – Treasury, Markets and Wholesale Banking Products of Axis Bank, said.

Typically, HQLA carry lower yields than loan assets, so it could have a positive impact on banks' net interest margins, Gambhir said. Brokerage Morgan Stanley expects that a 6% improvement in LCR will accelerate loan growth by 1-2% and improve margins by 2-4 basis points next year.

Further, RBI's move to rationalise the composition of wholesale funding from 'other legal entities' and reducing funding from non-financial entities at a run-off rate of 40% from 100% currently is also a positive, the bankers said.

Non-financial entities include trusts of educational, charitable and religious nature; partnerships; associations of persons; proprietorships; limited liability partnerships (LLPs) and other incorporated entities.

The benefit of these changes will depend on the bank’s actual composition of retail and particularly wholesale liabilities, bankers said.

On Monday, RBI announced a new framework for liquidity coverage ratio, allowing banks to set aside lesser funds at 2.5% against retail deposits which are enabled with internet and mobile banking from 5% that was proposed in the draft guidelines.

For example, stable retail deposits enabled with internet and mobile banking will have a 7.5% run-off factor, and less stable deposits will have 12.5% as against 5% and 10%, respectively, prescribed currently.

"Assuming the December figures remain the same in April, banks will get an additional opportunity to increase their credit growth by 1-1.5% without needing to raise any additional resources," said Karthik Srinivasan, group head of financial sector ratings at ICRA.

Based on the data submitted by banks to the RBI as of Dec. 31, 2024, it is estimated that the net impact of these measures will improve banks' LCR at the aggregate level by around 6 percentage points as of that date, the central bank said. The final norms will come into effect from April 1, 2026.

Emkay Global Financial Services believe that most scheduled commercial banks--HDFC Bank, ICICI Bank, Axis Bank, Yes Bank and City Union Bank – would be carrying a healthy proportion of deposits from these customers. However, this would possibly be lower for small finance banks.

The revised LCR norms now offer banks significant relief. While many had already strengthened their LCR buffers over the past year in anticipation of stricter norms, the eased guidelines should now make maintaining LCR more manageable.

According to Motilal Oswal Financial Services, banks with lower LCRs, such as AU Small Finance Bank, IDFC First Bank, IndusInd Bank, and Federal Bank, stand to benefit the most from relaxation.

Additionally, banks with a lower share of retail deposits, such as IndusInd Bank, AU Small Finance Bank and RBL Bank, will be aided by a lower run-off factor on wholesale deposits.

Nuvama Institutional Equities said that this move will be positive for Kotak Mahindra Bank, which has focused on wholesale deposits recently.

While several banks had already strengthened their LCR buffers over the past year in anticipation of stricter norms, this change of heart at RBI should now make maintaining LCR more manageable, analysts said.

Overall, with two rate cuts already in place, banking system liquidity in significant surplus and now the revised LCR guidelines being more accommodative, credit growth in the banking system is seen inching up to 13% in the current financial year, Bernstein said in a note.