RBI's proposed LCR norms to moderate credit growth of banks - ICRA
This story was originally published at 15:47 IST on 29 August 2024
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MUMBAI – The Reserve Bank of India's proposed changes in the liquidity coverage ratio framework will moderate the reported liquidity coverage ratio and credit growth of banks, according to ICRA.
The proposed norms will reduce the system-wide reported liquidity coverage ratio by 14-17% from 130% reported in Jan-Mar to 113-116% due to higher run-off factors for certain deposits and haircuts on high-quality liquid assets, ICRA said in a report today.
"A decline in LCR would need banks to place a higher share of their incremental deposits towards high-quality liquid assets instead of deploying these deposits for credit growth," ICRA said.
The RBI, in July, released draft guidelines on the Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio, which proposed that banks should assign an additional 5% run-off factor on internet and mobile banking-enabled retail deposits. It also proposed tighter norms on the valuation of high-quality liquid assets and to bring other sources of liabilities of banks under the liquidity coverage ratio framework.
ICRA said banks will need to rework their credit and deposit growth strategy, especially where the liquidity coverage ratio declines to a level closer to the regulatory requirement of 100%.
To recoup the liquidity coverage ratio loss, banks are likely to focus more on retail deposits by reducing the share of wholesale deposits, moderating credit growth and deploying a higher share of deposits to high-quality liquid assets, the rating agency said.
"With the declining share of retail and small business deposits of banks, ICRA expects the interest rate on retail deposits to remain elevated even if the credit growth slows down," ICRA Financial Sector Ratings Vice President and Sector Head Sachin Sachdeva said.
ICRA expects banks to moderate their credit growth targets in the run-up to the proposed implementation of revised LCR norms from Apr 01, 2025, resulting in an improvement in credit-deposit ratio and liquidity buffers.
"With lower growth aspirations, banks can be selective with the lending segments they choose to grow, for improved pricing power. To neutralise the impact on profitability because of the proposed LCR guidelines, banks will need to hike their lending rates by 10 bps. This could mean a higher cost for the borrowers," Sachdeva said. End
Reported by Richard Fargose
Edited by Saji George Titus
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For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.
Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.
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