RBI's new liquidity norm to free up $35 bn, likely boosting credit growth

The Reserve Bank of India's relatively relaxed final guidelines on banks' liquidity coverage ratio (LCR) is expected to free up capital worth up to ₹3 trillion ($35.24 billion) that could boost credit growth by as much as 2 per cent, analysts said.

On Monday, the RBI lowered the proportion of high-quality liquid assets (HQLA) - cash, central bank reserves and federal government bonds - that banks are required to hold against digitally linked deposits, saying the net impact will improve banks' LCR by around 6 percentage points as of December-end.

India's banking system, which has an estimated HQLA of almost ₹45 trillion to ₹50 trillion, could have an additional ₹2.7 trillion to ₹3 trillion in lendable resources, said Anil Gupta, senior vice president and co-group head - financial sector ratings, Icra.

This is equivalent to 1.4-1.5 per cent of additional credit growth potential, he said.

Macquarie's estimation of additional deployable liquidity also came in around ₹2.5-3 trillion, implying a potential increase between 1.4-1.6 percentage points in credit growth for the banking system.

Morgan Stanley analysts, in a note, estimated an additional loan growth of 1-2 per cent.

Slowing credit growth has remained a major cause of concern for Indian lenders and the RBI at a time when the authorities are looking to push growth.

Loan growth at Indian banks moderated for an eighth straight month in February, as per central bank data. Earlier this month, HSBC cut its credit growth estimate for the last financial year to 11.5 per cent from 12.5 per cent.

The guidelines would be implemented from April 1, 2026, a year later than what was proposed earlier, with the RBI saying that all banks will continue to meet the minimum regulatory requirements comfortably until the implementation.

Morgan Stanley expects some benefits to be visible in the earnings for the current financial year as lenders have been maintaining the LCR at 115 per cent-130 per cent against a requirement of 100 per cent. The brokerage also estimated margin improvement of around 2-4 basis points after the implementation.