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Informist, Friday, Jan. 10, 2025
 

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--Fin min source: Change in RBI leadership may delay rollout of LCR norms 
--CONTEXT:RBI in Jul had proposed implementation of new LCR norms from Apr 1
--Fin min source: Don't see urgent need to implement LCR norms
--Fin min source: RBI may look at staggered, delayed rollout of LCR norms
--Fin min source: Top level changes at RBI may delay project financing norms

 

By Aaryan Khanna, Priyasmita Dutta, and Sagar Sen

 

NEW DELHI – A change at the helm of the Reserve Bank of India and a pushback from the government may bring relief to the banking sector, which has been bracing for increased regulatory burden from the proposed Liquidity Coverage Ratio norms. A senior finance ministry official said the tightened norms, which were set to kick in from Apr. 1, have been placed on the back burner for now. "It is very unlikely the norms will be implemented from the earlier set deadline," the official told Informist.

 

The official said there also might be a delay in implementing RBI's proposed draft project financing norms. While the implementation of the Liquidity Coverage Ratio norms had a specific timeline, the central bank did not set a date of applicability of the project financing norms. However, it had said the new norms would take effect from the date on which the draft is finalised. Though the sector was apprehensive of both the draft norms, concerns regarding the Liquidity Coverage Ratio norms has escalated as the deadline to implement them is fast approaching.

 

"The banks were already resisting the implementation of the norms, and we feel there is no urgency at this point in time. However, if these norms are necessary for financial stability, then the RBI may look at staggered and delayed implementation," the official said.

 

Both the norms were announced under the leadership of former RBI governor Shaktikanta Das, whose term ended on Dec. 10. The government appointed Sanjay Malhotra, the erstwhile revenue secretary in the finance ministry, to succeed Das. Malhotra will be joined at the next meeting of the Monetary Policy Committee by another new member as Deputy Governor Michael Patra's term is scheduled to end next week. The government has already begun the process of looking for Patra's successor. 

 

On Jul. 25, the RBI released its draft guidelines on Liquidity Coverage Ratio, which proposed that banks should assign an additional 5% run-off factor to internet and mobile banking-enabled retail deposits. It also proposed tighter norms to value banks' High-Quality Liquid Assets, among other changes. Currently, banks must maintain High-Quality Liquid Assets worth 100% of their expected outflows for the next 30 days.

 

The tweaks proposed by the central bank are seen pushing up the computed amount of outflows against which banks have to maintain liquidity buffers. This, in turn, will lead to an increase in the requirement of High-Quality Liquid Assets, which primarily include government securities. Quoting a senior finance ministry official, Informist had exclusively reported in October that the Department of Financial Services had written to the central bank and pitched for staggered implementation of the proposed Liquidity Coverage Ratio norms. The government now has an even stronger reason to dissent against the proposed guidelines as risks to economic growth have escalated, a situation which would worsen if banks hold back on lending.

 

While Liquidity Coverage Ratio-related gilt purchases, particularly for bonds maturing in five years, picked up after the draft norms were released, these have petered out in the last few months as banks have been increasingly hopeful that the norms would not be implemented in time. While some bankers expect phased implementation over a few quarters, others have said the RBI could junk the plan in its current form entirely. Banks are also expecting to reduce their liquid holdings to around 15% in excess of the 100% mandate of the LCR, against current internal aims of 120%, to reduce the costs of holding additional securities, treasury officials said.

 

With the proposed changes in LCR norms, banks said they would have to set aside nearly 30% of their deposits to meet the RBI's various regulatory demands, which would put a constraint on their ability to lend competitively. In individual discussions with the RBI, banks have proposed that funds earmarked for the cash reserve ratio be accounted for as a high-quality liquid asset, since it serves the same regulatory purpose in a crisis, treasury officials said. At a meeting with RBI officials on Thursday on liquidity measures, banks had sought clarity on the implementation of the new LCR norms.

 

"There's a strong sense that the implementation of the LCR norms will be delayed, considering the final norms have not been notified yet, and we're in the last quarter of the fiscal," a treasury head at a private bank said. "While banks have been preparing for it, there is no chance that the system will be ready for it by April if they announce it now. At most, they can introduce a very watered-down version on Apr. 1."

 

On the draft project financing norms, however, the matter is a bit more complex. But at the heart of the concerns was the proposed increase in lenders' provisioning requirements. 

 

A few non-banking finance companies suggested that there is a case for the RBI to consider a lower provisioning requirement for government-backed financial infrastructure lending institutions, especially those involved in government spending. The finance ministry, which has been banking on infrastructure spending to revive the economy, batted for the lenders and suggested a complete rethink of the draft norms as these could tighten credit flow towards infrastructure projects. But, the ministry did not buy the argument of carving out special provisions for Centre-backed entities, as the government would prefer uniform treatment across lenders--public or private, banks or NBFCs.

 

On May. 3, the RBI had proposed tighter guidelines on project financing by banks and NBFCs to avoid large defaults on infrastructure loans. As per the draft norms proposed by the central bank, lenders would have to make provisions of up to 5% of the outstanding exposures during construction, as against 0.4% currently, which would be reduced to 2.5% once the asset turns operational.

 

The draft project financing norms, if implemented, will put pressure on the already small working capital of lenders, apart from adding stress to their core fundamentals. In December, Deputy Governor M. Rajeswar Rao said that the RBI had received significant feedback on the draft project financing norms.  End

 

Edited by Tanima Banerjee

 

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