RBI Relaxes LCR Norms to Boost Bank Liquidity and Credit Growth

The Reserve Bank of India (RBI) has revised its Liquidity Coverage Ratio (LCR) norms, easing the regulatory burden on banks and freeing up substantial capital. These changes are especially relevant in light of increased digital banking activity and the need for robust liquidity management.

Key Highlights:

Reduced Run-Off Factors for Digital Deposits

• Stable retail deposits with internet/mobile banking: Run-off factor reduced from 10% (draft) to 7.5%.
• Less stable digital deposits: Increased to 12.5%, up from the current 10%, but lower than the proposed 15%.
• Impact: This lowers the requirement for banks to hold liquid assets against these deposits, boosting liquidity.

Lower Run-Off Rate for Non-Financial Entities

• Deposits from trusts, partnerships, LLPs, and similar bodies will now attract a 40% run-off factor, down from 100%.
• Significance: This frees up high-quality liquid assets (HQLAs), making it cheaper for banks to meet LCR norms.

Effective Date and Implementation

• New norms will come into force from April 1, 2026, giving banks ample time to adjust their internal systems.

Estimated Impact on Banking Sector:

• Improvement in system-wide LCR by approximately 6 percentage points.
• Potential release of ₹2.7–3.0 lakh crore (₹2.7–3.0 trillion) in lendable resources.
• Expected to boost credit growth by 1.4–1.5%.
• Banks can maintain regulatory LCR requirements comfortably, ensuring stability during digital fund withdrawals.

Contextual Reference

• This policy shift also reflects learnings from the collapse of Silicon Valley Bank (SVB) in the US, which was triggered by a digital bank run.

Industry Reaction

• The move has been widely welcomed by the banking sector, which had earlier raised concerns over the stringent draft norms.
• Analysts and credit rating agencies, including ICRA, have projected positive outcomes for liquidity and credit expansion.

• Major beneficiaries:
  • SBI, HDFC Bank, and ICICI Bank are expected to benefit from the Reserve Bank of India’s updated Liquidity Coverage Ratio (LCR) norms.
• Reduction in runoff factor:
  • RBI reduced the runoff factor on deposits from non-financial entities like trusts, partnerships, and LLPs from 100% to 40%.
  • These changes are expected to unlock ₹4 trillion in liquidity for banks from the ₹10 trillion held in such deposits.
• IMB-linked deposits adjustment:
  • An additional 2.5% runoff rate will be applied to retail deposits accessed via internet and mobile banking (IMB).
• Implementation timeline:
  • New LCR norms come into effect from April 1, 2026, providing banks with ample transition time.
• Impact on sector liquidity:
  • Sector-wide LCR is projected to rise by 6%, with all banks expected to meet the minimum liquidity requirement by December 2024.

TET & Mint