In a significant relief to banks, the Reserve Bank of India (RBI) has deferred the implementation of liquidity regulations at least by a year. RBI governor Sanjay Malhotra on Friday said that the liquidity coverage ratio (LCR), project finance and expected credit loss (ECL) norms will not be implemented until March next year. In addition, the banks will get sufficient time, as the apex bank will implement these guidelines in phases.
“I want to clarify about LCR that we will give sufficient time. I do not think March 31, 2025, is giving sufficient time. So, certainly they will not be implemented at least, before March 31 2026. That is the kind of timeline needed at the minimum,” Malhotra said in the post-policy press conference.
The decision was in line with the government’s feedback to the apex bank. Earlier this week, M Nagraju, secretary, department of financial services, said that the government had given its feedback that it does not want liquidity to locked up at a time when the conditions were already tight.
Malhotra in his policy statement said that while the interest of the economy demands financial stability and consumer protection, RBI’s mandate is to enhance both of them. “We recognise that just like there are no free lunches, regulation to enhance stability and consumer protection too is not devoid of costs. There are trade-offs between stability and efficiency. We will keep this trade-off in mind while formulating regulations. It will be our attempt to strike the right balance, keeping in view the benefits and costs of each and every regulation.”
LCR guidelines were supposed to be rolled out on April 1 this year. Consequently, banks have already taken care of the impact of these guidelines by stepping up their purchases of high-quality liquid assets. LCR draft guidelines require banks to increase their investments in high-quality liquid assets. Under the guidelines, RBI has proposed to impose an additional run-off factor of 5% on both stable and less stable retail deposits that are enabled with internet and mobile banking facilities.
Under project finance guidelines, banks were required to set aside 5% as provisions for loans given for infrastructure and real estate projects.
Icra, in one of its reports, said that the impact of the whole transition to IndAS, including the ECL framework, could be as much as 300 to 400 basis points. LCR norms are likely to have a 200-250% impact on banks’ net demand and time liabilities(NDTL), experts said.
“With focus on balancing risks and efficiency of the banking system, we expect some softening in proposed regulatory changes. This will positively support the risk appetite of lenders and support credit growth amid recent slowing down,” said Anil Gupta, senior vice-president, group head, financial sector ratings, Icra.
Dinesh Khara, former chairman, State Bank of India, said that this kind of headroom given to banks will give them enough elbow room to orient their treasury investment policies so that it may not be a shock at all. He added that when the system liquidity is bit of a concern, this will ensure enough liquidity in the system to help growth initiatives of the economy. “Overall, it is a welcome move.”
“The deferred implementation of LCR guidelines is a net positive for the banking sector which is already constrained by higher cost of funds,” said Garima Kapoor, economist, Elara Capital.