Several banks oppose draft LCR circular, say may affect loan growth

Claim it will impact retail deposits as 90% are digitally linked

Several banks have written to the Reserve Bank of India (RBI) opposing a draft circular on liquidity coverage ratio (LCR), which proposed an additional run-off factor of 5 per cent for retail deposits enabled with internet and mobile banking (IMB) facilities.

This opposition was on the ground that it will impact disbursement of loans since banks are facing challenges in deposit mobilisation.

In July, the banking regulator came out with draft guidelines that mandated banks to assign an additional 5 per cent run-off factor for such retail deposits.

IMB is not limited to internet banking, mobile banking and Unified Payments Interface (UPI).

It enables a customer to digitally transfer funds from their accounts.

If the draft norms are implemented, stable retail deposits enabled with IMB will have 10 per cent run-off factor and less stable deposits enabled with IMB are set to have 15 per cent run-off factor.

According to bankers, most of all the retail deposits are enabled with IMB facilities.

“More than 90 per cent of our retail deposits are linked to internet and mobile banking. So, the proposed norms will impact almost entire retail deposits. If the norms are implemented, then banks will not encourage customers to link their accounts with mobile and internet banking,” said a top official from a large public sector bank (PSB). He termed the move as anti-digitisation.

According to sources, while many banks have written to the regulator expressing their concern over the new norms, the Indian Banks’ Association (IBA) has not shared its views so far.

“It’s still under process,” a top IBA official told Business Standard. The last date for submitting feedback was August 31.

The move comes at a time when banks are scrambling for deposits amid steady loan growth.

Deposit growth has been trailing loan growth for nearly two years now.

This is an issue the RBI has red flagged as banks were taking greater recourse to short term non-retail deposits to bridge the gap.

According to data compiled by rating agency ICRA, the share of deposits from retail customers and small businesses declined by almost 4.8 per cent since its peak in June 2021 to 59.5 per cent of total deposits by March 2024.

“This reflects a relatively higher growth in wholesale deposits for banks, when compared to retail deposits. Since such wholesale deposits have higher run-off factors, a larger share of such deposits adversely impacts the reported LCR for banks,” ICRA said in a note late last month.

According to ICRA’s estimate, LCR of banks will fall from 130 per cent as in Q4 of FY24 to 113-116 per cent if the proposed norms are implemented.

RBI norms mandate banks to maintain minimum 100 per cent LCR; the norm came into effect from January 1, 2019.

“To recoup the LCR losses, banks may focus more on retail deposits, reducing the share of wholesale deposits, moderating credit growth and deploying a higher share of deposits to the high-quality liquid assets (HQLA),” ICRA said.

According to a senior official from a mid-sized private sector bank, the norms, if implemented, would hamper loan growth and make loan pricing dearer.

According to ICRA’s assessment, the non-food bank credit growth will slow to Rs 19-20.5 trillion (11.6-12.5 per cent year-on-year) in FY25 from Rs 22.3 trillion (16.3 per cent) in FY24.

LCR was introduced by the Basel Committee on Banking Supervision, as part of the post global financial crisis (GFC) reforms. It requires banks to maintain HQLAs — essentially government bonds, to meet a 30-day net outgo under stressed conditions.

The fine print 
 

Draft guidelines mandates banks to assign additional 5% run-off factor for retail deposits, enabled with internet and mobile banking (IMB) facilities
 

IMB facilities include internet banking, mobile banking and UPI
 

Most of the retail deposits are enabled with internet and mobile banking facilities, bankers say If implemented:
 

Stable retail deposits enabled IMB to have a 10% run-off factor
 

Less stable deposits enabled IMB to have a 15% run-off factor
 

Banks’ LCR may fall to 116% from 130% in Q4FY24, according to ICRA’s estimate