In a concerted effort to mitigate potential constraints on lending capacities, several of India’s leading banks are set to request the Reserve Bank of India (RBI) to defer the enforcement of stringent liquidity coverage ratio (LCR) norms scheduled for April 1, 2025. This appeal is anticipated to be channeled through the Confederation of Indian Industry (CII) during an upcoming meeting with the newly appointed RBI Governor, Sanjay Malhotra.

Context and Rationale

The proposed LCR regulations, introduced in July 2024, mandate banks to allocate a larger portion of their deposits into sovereign bonds. This measure aims to serve as a safeguard against sudden withdrawals, particularly in the era of digital banking where rapid fund transfers are commonplace. However, banks contend that the immediate implementation of these norms could exacerbate existing liquidity challenges, thereby impeding their lending capabilities.

As of December 27, 2024, the banking system reported a deposit growth of 10.2% year-on-year, trailing behind a credit growth of 12.4%. This disparity underscores the tightening liquidity conditions within the sector. While the RBI has undertaken measures such as reducing the cash reserve ratio (CRR) and increasing cash injections via repo operations, banks are advocating for additional interventions to alleviate the liquidity strain.

Specific Concerns

A focal point of the banks’ apprehension is the RBI’s proposal to assign an additional 5% run-off rate to retail deposits accessible through internet and mobile banking platforms. The ‘run-off’ rate pertains to the assumed percentage of deposits that could be withdrawn abruptly, necessitating banks to maintain a higher stock of high-quality liquid assets (HQLAs) to manage such contingencies. Implementing this adjustment would compel banks to significantly increase their holdings in government securities, potentially amounting to an additional ₹4 trillion ($46 billion).

Industry’s Position

The Indian Banks’ Association (IBA) has previously engaged with the RBI, proposing a reduction of the additional run-off requirement from the suggested 5% to a range of 2-3%. The IBA also recommended a phased implementation to allow banks adequate time to adjust to the new requirements. Despite these representations, indications suggest that the RBI may uphold the original proposal, emphasizing the necessity of bolstering liquidity buffers in light of potential rapid digital withdrawals.

Government’s Perspective

The Indian government has expressed reservations regarding the RBI’s proposed liquidity norms, voicing concerns over their potential impact on credit growth. In communications with the RBI, the government has advocated for a more nuanced approach, suggesting that the central bank assess risks on a sector-specific basis. This perspective aims to balance the imperative of financial stability with the need to sustain economic growth through adequate credit availability.

Implications and Outlook

The outcome of the forthcoming discussions between the CII and RBI Governor Sanjay Malhotra will be pivotal in determining the trajectory of the proposed LCR norms. A deferment or modification of the implementation timeline could provide banks with the necessary latitude to adapt without constraining their lending operations. Conversely, maintaining the current schedule underscores the RBI’s commitment to fortifying the banking sector’s resilience against liquidity shocks, particularly in an increasingly digitalized financial ecosystem.

As the dialogue progresses, stakeholders will keenly observe the RBI’s decisions, which will invariably influence the operational dynamics of banks and the broader economic landscape. Striking an optimal balance between regulatory prudence and growth facilitation remains the central challenge in this evolving scenario.