On Thursday, the Reserve Bank of India (RBI) released draft norms for banks concerning the Liquidity Coverage Ratio (LCR). The new guidelines require banks to maintain a higher stock of liquid securities to buffer against potential impacts of sudden depositor withdrawals facilitated by technology. These draft norms are set to come into effect on April 1, 2025.
What is the context of the New Rule
The RBI said the banking sector has experienced rapid transformation in recent years. While technology has enabled instantaneous transfers and withdrawals, it has also increased risks, necessitating proactive measures. In other words, the RBI is concerned that tech-enabled deposits run greater risks of withdrawals.
What does it say?
The RBI’s new rule requires banks to apply an additional 5 percent run-off factor for retail deposits that are accessible via internet and mobile banking. Specifically, stable retail deposits with these facilities will face a 10 percent run-off factor, while less stable deposits will have a 15 percent run-off factor. This means that banks must be cautious with technology-enabled deposits, as these could potentially be withdrawn rapidly. Additionally, unsecured wholesale funding from non-financial small business customers will be treated similarly to retail deposits.
What does analysts say?
Banking analysts predict that the new RBI regulations will have a significant impact on banks. According to Gaurav Jani, a research analyst at Prabhudas Lilladher Pvt. Ltd, the increase in the run-off factor by 5 percent will heighten the deposit and liquidity requirements for banks. “Based on our calculations, a 5% increase in the run-off factor would roughly equate to 3-4% of loans being set aside for liquidity. Banks with a higher proportion of retail deposits, higher loan yields, and lower net interest margins (NIM) or return on assets (RoA) will be more affected,” Jani noted.
Will there be impact on NIMs?
Jani also estimates that the new norms could impact core earnings for FY26, with potential NIM reductions of 7-10 basis points, a decrease in core RoA by 6-9 basis points, and a hit to core PAT of 3-7%. Large private banks like ICICI Bank and Kotak Mahindra Bank may experience less impact, while HDFC Bank and Axis Bank will face moderate effects. In contrast, IndusInd Bank, public sector banks, and some mid-cap banks could see more pronounced impacts due to lower NIM and weaker RoA.