Liquidity coverage ratio (LCR) of banks is set to decline as the share of wholesale deposits is set to rise with the relative share of retail deposits declining. This will require banks to deploy deposits in high quality liquid assets (HQLA) than credit which could result in a slowdown in credit growth according to ratings firm Icra
The proposed changes the LCR guidelines through its July 25 draft circular will reduce the system-wide reported LCR by 14-17 percent from 130 percent reported during Q4’2023-24 to 113-116 percent on account of higher run-off factors for certain deposits and haircuts on the HQLA, Icra said.
Banks would then need to rework their strategy on credit and deposit growth, especially where the LCR declines to a level closer to the regulatory requirement of 100%. To recover the LCR loss, banks may focus more on retail deposits, reducing the share of wholesale deposits, moderating credit growth and deploying a higher share of deposits to the HQLA.
“With the declining share of retail and small business deposits of banks, Icra expects the interest rate on retail deposits to remain elevated even if the credit growth slows down” said Sachin Sachdeva, vice president & sector head – financial sector ratings, Icra. ” The peak deposit rates for banks, hence, may stay elevated despite expected rate cuts in H2 FY2025, implying delayed transmission. In such a scenario, the banks may cut down low-yielding wholesale exposures, who will then have to shift to the debt capital markets or external commercial borrowings”
Recent regulatory measures like urging banks to reduce their credit-to-deposit (CD) ratio, increasing risk weights towards high growing loan segments, and the proposal to review the LCR framework, all point to the need to align credit growth with deposit growth while focusing on growing retail deposits. Icra expects the non-food bank credit (NFBC) growth to slow down to Rs. 19.0-20.5 lakh crores (11.6-12.5% YoY) in FY2025 from Rs. 22.3 lakh crore (16.3% YoY) in FY20241. Incremental deposit growth is expected to moderate to Rs. 19.4-20.0 lakh crores (9.5-9.8% YoY) in FY’2025 from Rs. 23.2 lakh crore (12.9% YoY) in FY’2024.
