Indian Banks Said to Ask RBI to Delay April Liquidity Rule
(Bloomberg) — Some of India’s largest lenders are planning to request concessions from the new head of the nation’s central bank regarding proposed liquidity regulations, arguing the rules could hamper efforts to boost lending, according to people familiar with the developments.
Banks plan to urge the Reserve Bank of India to delay the implementation of the new liquidity coverage ratio norms, currently due to take effect on April 1, according to the people, who declined to be identified discussing private matters. The request will be made through the Confederation of Indian Industry, which will meet recently-appointed RBI Governor Sanjay Malhotra in the coming days, the people said.
The tighter norms, announced in July by Malhotra’s predecessor, mandate banks to park a larger portion of their deposits in sovereign bonds as a buffer against sudden withdrawals in the age of digital banking. However, implementing them would add to the challenges faced by lenders already grappling with a cash squeeze in the banking system.
To be sure, the RBI did cut the cash reserve ratio — the proportion of deposits that banks must set aside with the central bank — in its December meeting, and this month stepped up cash injections via repo operations. Still, bankers are calling for more measures as deposit growth slows and economic growth falters.
Deposit expansion in the banking system was at 10.2% on-year as of Dec. 27, trailing the credit growth of 12.4%, according to the latest central bank data.
Lenders also plan to ask the RBI to consider the money already set aside for the cash reserve ratio as LCR, reducing the funds needed to meet the new requirement, the people said. An email to the CII did not immediately receive a response, while the RBI didn’t respond to an email seeking a confirmation of the meeting.
Read: India’s RBI Said to Mull Bolder Measures to Ease Cash Crunch
While proposing the guidelines, the RBI asked banks to assign an extra 5% run-off rate for retail deposits equipped with Internet and mobile banking facilities. Run-off refers to the likelihood of sudden deposit withdrawals, which could trigger a run like the one that broke Silicon Valley Bank in 2023.
Increasing the weighting would require lenders to build a larger buffer of assets that can be sold at short notice. For banks, however, meeting the higher LCR needs will mean having to buy government securities of up to 4 trillion rupees ($46 billion), ratings firm ICRA wrote in a July note.
Government securities qualify as the highly liquid assets that authorities consider eligible for calculating LCR, which requires banks to maintain sufficient assets to tide over 30 days of cash outflows.
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