Informist, Friday, Jul 26, 2024

By Aaryan Khanna

NEW DELHI – The Reserve Bank of India's proposed new norms on the management of liquidity coverage ratio are likely to drive up credit costs for banks and put pressure on margins, while also pushing demand from banks for short-tenure government securities, officials from bank treasuries said.

The central bank released draft guidelines on the Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio post market hours on Thursday. It proposes that banks should assign an additional 5% run-off factor on retail deposits opened by customers, who have internet and mobile banking facilities enabled, and tighten other norms on valuation of high-quality liquid assets as well as bring other sources of banks' liabilities under the liquidity coverage ratio framework.

"We estimate LCR hit of 11-18 percentage points for banks, and proforma LCR may fall below the threshold for Federal (Bank)," IIFL Securities said in a note. "We expect these norms to drive CD (credit-deposit) ratio lower, further intensify retail deposit competition and drive margins lower for the banks."

Bank treasury officials said the hit would be on the lower end of that range for mid-sized private banks that do not have a significant retail deposit base. However, for consumer deposit-focused megabanks in the country, such as State Bank of India and HDFC Bank, the hit to the liquidity coverage ratio could exceed 15%, officials said. As in the case of Federal Bank, this could threaten the maintenance of the minimum liquidity coverage ratio of 100% unless the bank builds up high-quality liquid assets such as cash or government securities, they said.

With such an increase, banks' ability to lend against such deposits decreases, prompting them to target an increase in deposits in order to continue growing their loan books. The RBI has asked for comments on the norms by Aug 31, and these are expected to kick in on Apr 1. Even with that delay in the norms becoming applicable, an increase in deposit rates may be the first line of defence for banks over the next few months.

"Nothing immediate (regarding the impact). But banks will have to plan out their deposit accretion well in advance," a treasury official at a private bank said. "They can't suddenly raise all that money."

To combat the impact of the norms on their liquidity coverage ratio, banks may choose to disable internet and mobile banking services for some accounts to keep the run-off factor on stable bank deposits at 5% and unstable deposits at 10%, which are the current levels. However, this is likely to dissuade customers and will be a hard-sell for banks as they look to build up their deposit books at a time when deposit growth is already lagging credit growth, bank officials said.

The intent of the RBI is seen as targeting features, such as swipe-in swipe-out, that have been offered by various banks to attract customers, which makes the deposit base less stable, some executives said. Meanwhile, a broader view was that the central bank was noting the fall in the systemic liquidity coverage ratio since credit growth began outpacing deposit growth in 2022-23 (Apr-Mar). According to the latest data, banks' loan growth was 17.4% on-year, while deposits grew only 11.1% on-year till Jun 28.

"We note that banks have been rapidly consuming excess liquidity in the last year to meet the strong credit demand, and system LCR has declined 12 percentage points to 135% (5% for private banks and 15% for PSU, or state-owned banks, since March 2022)," the IIFL Securities note said.

Informist reported in June, quoting banking officials, that the RBI had conducted a special audit of banks to gauge if they held required securities to meet the liquidity coverage ratio. The central bank was worried that some banks may not be able to meet the rules on a day-to-day basis due to their increased credit offtake.

At the same time, many bankers were perplexed as to why the central bank would clamp down so harshly on internet banking benefits after the increase in digitalisation of banking system post the demonetisation of high-value banknotes in 2016.

"We understand the move is going to happen. At the same time, LCR is bloat for the bank," a treasury head at a state-owned bank said. "There will be asset-liability mismatches if the euphoria (on bonds) continues, but considering the size of our balance sheet, we can't just jump one way or another without analysing the scenarios. And also, we are hoping there would be some relaxation by the time the final norms come about."

DEMAND FOR GILTS

With deposit rates likely to be the first to increase, and lending rates unlikely to grow the same amount without disrupting the bank's business, several bankers were worried about finding high-quality and high-yielding assets to match the higher cost of the liabilities.

Banks will have to maintain large amounts of government bonds as a percentage of deposits, and mostly it will be short-term bonds that will be kept aside for the implementation of the new guidelines, treasury officials said. Bonds maturing between December 2025 and March 2028 will be preferred by banks, as these will correspond to the up-to-three-year maturity after the proposed norms come into effect from Apr 1.

Already, yields on short-term bonds have crashed to near-multi-year lows. The five-year benchmark gilt yield, a proxy for short-term bonds, hit 6.82% today, the lowest since Aug 5, 2022. However, treasuries are unlikely to swell their liquidity coverage ratio holdings anytime before February. Instead, balance sheet managers are locking in yields that seem on their way down. The combination of increased rate cut bets, both in the US and India, and reduction in the government's net short-term borrowings in the Union Budget for 2024-25 is also driving short-term bond yields lower.

"This will have multiple impacts: more demand on SLR (statutory liquidity ratio securities), credit will become expensive, rush for deposits means higher rates on a comparative basis," an official at another private bank said. "Actually, we were expecting the regulator to be more proactive and come out with more clarity on certain specific aspects, which we now intend to cover in the feedback." End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Namrata Rao

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