RBI’s new liquidity coverage guidelines are big boost to banks

Mumbai: In a huge relief to the banking system, the Reserve Bank of India has allowed banks to set aside a lower stock of liquid assets against deposits raised through digital channels, in the event of a potential run on banks.

In the final guidelines on liquidity coverage ratio (LCR) released on Monday, RBI said that banks need to assign a run-off factor of only 7.5% on these retail deposits instead of the 10% proposed in the draft guidelines.

Run-offs happen when individuals or businesses withdraw their deposits, which banks do not anticipate. Stable retail deposits enabled with internet and mobile banking (IMB) will have a 7.5% run-off factor, and less stable deposits will have a 12.5% run-off factor, as against 5% and 10% respectively, prescribed currently.

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In its guidelines, RBI also said that funding from non-financial entities like trusts (educational, charitable and religious), partnerships, limited liability partnerships, etc., will attract a lower run-off rate of 40% as against 100% currently. This move will free up capital and make it easier and cheaper to meet LCR requirements.

According to the RBI, the new measures are expected to improve banks’ LCR by around 6 percentage points, based on the data available as on 31 December.

“All the banks would continue to meet the minimum regulatory LCR requirements comfortably. Reserve Bank is sanguine that these measures will enhance the liquidity resilience of banks in India, and further align the guidelines with the global standards in a non-disruptive manner,” it said in the press release.

The new guidelines will be effective from 1 April 2026, giving banks enough time to transition their systems to the latest standards for LCR computation.

LCR norms require banks to maintain a stock of high-quality liquid assets (HQLA), primarily government securities, to tide them over a hypothetical 30-day stress scenario in which deposit outflows occur. Currently, banks are required to maintain an LCR of 100%.

Relief to banks

The new guidelines come as a relief to banks, which had earlier expressed concerns that the draft norms might hinder their ability to provide credit. Banks had even urged the finance ministry to seek relaxation or deferment of these guidelines. Also, considering systemic liquidity is tight and deposit mobilisation is slow, the impact of the draft norms on banks was expected to be high.

RBI's move aims to keep banks prepared for any sudden withdrawal of funds by clients using digital channels, similar to the US-based Silicon Valley Bank, which collapsed last year after a bank run.

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“As per RBI's estimate, the reported LCR of the banking system will improve by 6% as of 31 December 2024. With an estimated HQLA of almost ₹45-50 lakh crore ( ₹45-50 trillion) for the banking system, this could free up the lendable resources by almost ₹2.7-3.0 lakh crore ( ₹2.7-3.0 trillion) and support the credit growth of the banks. This headroom can be equivalent to 1.4-1.5% of additional credit growth potential for the banking system,” said Anil Gupta, senior VP & co-group head-Financial Sector Ratings, Icra.