Indian Banks Seek Easing of Liquidity Coverage Mandate From RBI

Indian banks have requested the industry regulator to ease the existing liquidity coverage mandate to free up more funds for lending.

This appeal comes as Mint Road has warned financiers about deposits lagging behind credit disbursements in a booming economy, potentially creating future asset-liability imbalances for lenders.

Banking industry executives informed that lenders have urged the Reserve Bank of India (RBI) to relax the mandate, requiring them to allocate fewer funds to highly liquid investments.

This would allow banks to lend more using the surpluses freed from an easier liquidity coverage ratio (LCR) mandate.

The requests coincide with a near-80 aggregate credit-deposit ratio for the industry, with banks often selling bond holdings to meet the increasing demand for loans.

"The request from the banks to the RBI is to reduce the outflow factor for the segments under which corporates and other legal entities belong from 40 per cent and 100 per cent, respectively," a top banking source aware of the development said. "This would bring down the denominator for the calculation of LCR, which automatically makes LCR compliance go up and opens up more space for lending.”

Sources indicated that banks have asked the RBI to consider relaxing the 'runoff factors' or 'outflow factors' under the LCR for two deposit brackets.

Currently, banks' liabilities from non-financial corporates have a runoff factor of 40 per cent, while liabilities from other legal entities have a runoff factor of 100 per cent.

This means that over a hypothetical 30-day period of stress, 40 per cent and 100 per cent of such deposits, respectively, could flow out from the lender.

Thus, banks must maintain a sufficient buffer of high-quality liquid assets (HQLA) to match such a hypothetical outflow.

If the RBI eases the mandate, banks will need to park less money in HQLA – securities that ensure a bank can meet sudden outflow pressures.

An email sent to the RBI requesting comment on the matter remained unanswered.

The LCR, introduced globally in the aftermath of the subprime crisis as a banking reform measure, requires banks to hold a certain quantity of government bonds that can be liquidated to meet a hypothetical 30-day stress scenario.

The regulatory leeway sought by banks comes amid the possibility of the RBI laying down stricter LCR norms for another set of deposits – insured and uninsured retail deposits – especially after the crisis at the US-based Silicon Valley Bank in 2023.

This regional bank experienced a cascade of retail outflows exacerbated by instant banking channels, sources said.

The RBI stated in April that it would review the LCR framework.

Sources indicated that during discussions with the RBI, Mint Road requested banks to provide historical behavioural data on the movement of deposits in the brackets for which lenders have requested relaxations.

"There is a chance that the RBI may increase the outflow factor for what it calls the 'stable' and 'less stable' retail deposit buckets for LCR computation from the current level of 5 per cent and 10 per cent because of the experience with the Silicon Valley Bank. What banks have been saying is that in the other buckets such as corporate and other legal entities, the risk of sudden outflows is not as serious as to call for a 100 per cent outflow factor," another source said.

Following the global financial crisis of 2007-08, the Basel Committee on Banking Supervision introduced the LCR, which requires the maintenance of HQLA sufficient to meet 30 days of net outflows under conditions of stress. HQLA comprises banks' investments in government securities.