The Revised LCR Framework Aftermath

Siddharth Shah & Kaushal BhatiaThe swift adoption of technology in the Indian banking sector has not only enhanced the convenience and speed of financial transactions but has also made bank deposits less stable.In response, the Reserve Bank of India has revised the Basel III Liquidity Coverage Ratio framework to bolster banks' capacity to maintain liquidity resilience and withstand potential shocks.The LCR is a measure of a bank's ability to meet short-term liquidity needs during a stress scenario. The goal is to ensure that banks have sufficient high-quality liquid assets, or HQLA, to survive a 30-day crisis.Simply put, the LCR is a ratio of a bank's liquid assets to its total net cash outflows over a 30-day period.The new RBI guidelines, effective April 1, 2026, reduce haircuts on HQLA and modify composition and run-off rates for certain deposits for LCR computation purposes.The rules apply to all commercial banks, excluding payments banks, regional rural banks and local area banks.Government securities will be valued at their current market value, adjusted for applicable haircuts in accordance with the margin requirements under the liquidity adjustment facility and marginal standing facility. Previously, no haircuts were applied to these securities for calculating the LCR..Credit Growth To Slow To 9.7-10.3% Due To High CD Ratio And LCR Changes: ICRA.Public sector banks may be at a disadvantage due to their deposit mix. According to the RBI’s data on deposit ownership in scheduled commercial banks as of December 2024, public sector banks have the highest concentration of household deposits, at 68.97% of total deposits.This could lead to increased outflows for LCR computation as the run-off factor for retail deposits and unsecured wholesale funding from non-financial small business customers with internet and mobile banking facilities has risen to 7.5% for stable deposits (versus 5%) and 12.5% for less stable deposits (vs 10%).In contrast, foreign banks operating in India will be the least impacted from the increase in the run-off factor for retail deposits, which account for only 11.06% of their total deposits.Private sector banks and small finance banks have lower concentration of household deposits than public sector banks, at 53.08% and 58.20%, respectively.A decrease in the run-off factor from 100% to 40% for non-financial corporates, including trusts, associations, partnerships, proprietorships, limited liability partnerships and other incorporated entities, is expected to benefit banks by reducing outflows.Foreign banks will benefit the most, as non-financial corporate deposits constitute 73.11% of their total deposits. In contrast, public sector banks have a significantly lower proportion at 10.25%. Private sector banks and small finance banks are relatively well placed at 22.79% and at 21.60%, respectively.As per the RBI, the revised guidelines are expected to improve banks’ LCR by about 6 percentage points, based on data submitted by banks as of December 31, 2024.The benefits of the reduced run-off factor for non-financial corporate deposits will offset the negative impacts of the haircut on Level 1 HQLA and the increased run-off factor for retail deposits and unsecured wholesale funding from non-financial small business customers.That said, deposits contractually pledged as collateral to secure a credit facility or loan will be treated as callable for LCR purposes, even if they were initially non-callable.Additionally, all demand and term deposits from small business customers under unsecured wholesale funding will be considered, without the previous limitation of only including deposits maturing in the next 30 days.Overall, the RBI's data and revised guidelines indicate that public sector banks may struggle due to their deposit composition, whereas foreign and private sector banks are poised to gain from the changes.However, the actual impact will vary from bank to bank, depending on their unique deposit and investment profiles.As the banking sector adapts to the new rules, their effects will be closely monitored in the coming months.Ultimately, the revised guidelines aim to equip banks for the changing banking landscape and mitigate potential risks.The authors are Director, Crisil Intelligence and Consultant, Crisil Intelligence, respectively..The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team..RBI’s Softer LCR Guidelines Are Positive Surprise As Analysts See System-Wide Liquidity Support

The Revised LCR Framework Aftermath

Public sector banks may be disproportionately impacted due to their deposit composition.

NDTV Profit

NDTV Profit

Follow Us

DOWNLOAD THE APP

The Revised LCR Framework Aftermath

Public sector banks may be disproportionately impacted due to their deposit composition.

Choose a plan

Follow Us

DOWNLOAD THE APP