Mumbai: Demand for short-term government securities is expected to rise between ₹4 lakh crore and ₹5 lakh crore, with the banking regulator proposing to revise norms on the computation of Liquidity Coverage Ratio (LCR), said officials from rating companies and bank analysts.
The LCR norms are tweaked to ensure banks are resilient in case they face a run-off on their deposits amid increased technology use that enables fund transfer 24×7.
The new norms would also impact net interest margins (NIM) as the stock of low yielding g-sec rises in banks’ books, and intensify competition for retail deposits, the people cited above said.
Late Thursday night, the RBI tightened the LCR guidelines wherein it proposed to impose an additional run-off factor on stable and less stable deposits.
The run-off factor implies the percentage of deposits withdrawn by the depositor, which a bank did not anticipate. LCR refers to a stock of high-quality liquid assets (HQLA)-primarily government securities-that banks must maintain to tide over a hypothetical 30-day stress scenario in which outflows occur.
As per the current regulations, banks must have HQLA equivalent to 100% of the next 30 days’ outflow (deposits and other borrowings). Most banks have an internal threshold ranging from 110% to 120%.
Bank analysts and rating agencies estimate that LCR could fall between 8% and 20%-varying from bank to bank- from the current level. Thus, to retain the current level of internal threshold, they will need to buy Rs 4-5 lakh crore HQLA.
“A 10% decline in reported LCR may additionally pose a requirement of additional HQLAs of almost ₹4 lakh crore at system level,” said Anil Gupta, vice president and co-group head, financial sector ratings, ICRA.
According to an IIFL Securities report, the guidelines, when implemented, would increase SLR demand and a reduction in loan-to-deposit ratio, lower asset yield, increase in retail deposit competition and deposit interest rates, lower NIMs, and lower G-Sec bond yields.
The RBI said the revised guidelines will be effective from FY26. The crux of the draft norms is that banks with higher share of internet and mobile banking customers will need to hold a higher share of HQLA since they face a higher risk of deposit flight.
“Banks do carry buffers over LCR norms, but to maintain current levels, they may need to increase deposit growth/trim loan growth, which could affect earnings by 4-10%, with a higher impact on PSU banks,” said a report by Jefferies.
The RBI has proposed an additional 5% run-off factor for retail deposits that are enabled with internet and mobile banking facilities (IMB). It said that stable retail deposits enabled with IMB shall have a 10% run-off factor as against 5% now and less stable deposits enabled with IMB shall have 15% run-off as against 10% now.
Unsecured wholesale funding provided by non-financial small business customers will be treated as retail deposits as above.
“The issue is there is a fine balance between LDR (loan to deposit ratio) and LCR that banks have to do and the tight liquidity conditions only complicates the matter,” said Macquarie in a report.
