Large banks to benefit from RBI's runoff factor move, say analysts

Large banks such as State Bank of India, HDFC Bank, and ICICI Bank will benefit from the Reserve Bank of India’s (RBI’s) final norms on the liquidity coverage ratio (LCR), according to analysts.

 

The new norms have allowed lowering the runoff factor on deposits from non-financial entities such as trusts to 40 per cent from 100 per cent.

 

The runoff factor is the percentage a bank expects to be withdrawn or transferred during a period of stress.

 

The norms, released on Monday, mandate an additional runoff rate on retail deposits linked to internet and mobile banking at 2.5 per cent.

 

Additionally, in a relief to banks, the RBI reduced the runoff factor on funding from non-financial entities like trusts (educational, charitable, and religious), partnerships, and limited-liability partnerships (LLPs) to 40 per cent from 100 per cent now. The guidelines will come into effect in April next year.

 

“The new norms lead to a rise of 6 per cent in the aggregate sector LCR as of December 24 and all banks shall meet the minimum LCR. Furthermore, banks have been given enough migration time as new norms are effective April 1, 2026. As such, the norms are positive for the banking sector,” broking firm Nuvama said in a report.

 

Lowering the runoff factor for non-financial firms will release around ₹4 trillion for banks. That can be used for lending because deposits from those institutions are about ₹10 trillion.

 

“The reduced runoff factor of 40 per cent on OLEs (other legal entities) is a distinct positive because the liabilities of the banking system from entities like trusts, partnerships, proprietorships, and LLPs are not insignificant,” said Lakshmanan V, group president and head (Treasury), Federal Bank.

 

Broking firm Emkay Global said in its report this would lower the liquidity burden on banks holding such deposits/funds.

 

“We believe that most scheduled commercial banks including large (HDFC, ICICI, Axis Bank), mid (Yes Bank), and small (CUBK) banks would be carrying a healthy proportion of deposits/funding from these customers,” said Emkay Global.

 

“For funding from some specific non-financial entities such as trusts, compared to 100 percent, the revised run-off factor is now 40 per cent, implying a savings of 60 percent. Therefore, the magnitude of this change is significant and more than offsets the impact of additional 2.5 per cent run-off factor for IMB-enabled retail deposits, and changes in valuation of HQLA securities. As disclosed by RBI, this should result in a net benefit of 6 percent in the LCR”, said Subha Sri Narayanan, Director, Crisil Ratings.

 

Further, this will help banks to improve their net interest margins (NIMs) and return on assets (RoA) because the funds locked in high-quality liquid assets can now be used to lend, said Motilal Oswal in its report.

 

It will benefit banks with a lower share of retail deposits and a higher proportion of eligible wholesale deposits.

 

“The norms are pragmatic, considering the balanced approach ... These measures will give a more realistic picture of short-term (for the next 30 days) liquidity profile of commercial banks,” said Biju E Punnachalil, general manager and chief risk officer, South Indian Bank.