✓ RBI’s draft guidelines on LCR are a part of its strategy to strengthen the Banks’ balance sheet from a long-term perspective, though it might lead to some near-term pain.
The good times may not last long and thus RBI is preparing banks for the long winter by building higher liquidity, provision and capital buffers.
✓ In the past banks have had liquidity runs and digital banking makes it even worse as the run could be swifter in times of distress as seen in the case of IIB, RBL post Yes Bank saga.
✓ Thus, RBI has called to increase the run-down rate on deposits linked to Internet & Mobile banking (IMB) by 5% from the current 5%/10%.
✓ This in effect will reduce the banks’ LCR by 8-11% assuming 50% of deposits (inc. rural) are linked to IMB and 12-19% assuming 90% are linked to IMB for large PVBs.
The impact would be moderate for select mid-cap banks and PSBs.
✓ From the Gsec demand point of view, there may not be a sudden spurt in Gsec demand owing to higher estimated HQLA, however, some pockets of banks may still see a higher immediate demand (read Foreign banks and small PSBs).
Banks may re-assess their risk management profile to see how much they want to align with the new estimated requirements. They may choose to hold lower buffers.
That said, it is structurally a positive for Gsec demand and DD-SS balance.
✓ As per our Banks team, these LCR guidelines will push banks to focus back on branch banking (even put caps on deposits to be redeemed via digital banking channels), while forcing them to mobilise more non-callable deposits and increase the share of HQLA (High-Quality Liquidity Assets) by keeping more liquidity on B/sheet via Cash/G-sec on B/sheet and other liquid instruments.
Higher LCR requirements may have some bearing on credit/deposit growth and to offset the cost of carrying additional liquidity, banks may have to keep the lending rates relatively higher and thus protect margins.
✓ The guidelines are still in the draft stage and may change when the final guidelines are out before the actual implementation from 1st Apr 2025.
Notably, we expect the implementation will happen at the beginning of the rate cut/liquidity easing cycle and thus the impact on margins will be relatively moderate v/s now.