Indian Banks Urge RBI to Postpone April Liquidity Rule
Some of India’s largest banks are preparing to request relief from the newly appointed Reserve Bank of India (RBI) Governor Sanjay Malhotra regarding upcoming liquidity regulations, arguing that the rules could hinder efforts to boost lending, according to sources familiar with the matter.Lenders plan to urge the RBI to postpone the implementation of the new liquidity coverage ratio (LCR) norms, currently set to take effect on April 1, the sources said.
The request will be made through the Confederation of Indian Industry (CII), which is scheduled to meet with Governor Malhotra in the coming days.
The stricter norms, introduced in July by Malhotra’s predecessor, require banks to allocate a larger share of their deposits to sovereign bonds as a safeguard against sudden withdrawals, particularly in the era of digital banking. However, banks argue that implementing these measures would add to existing challenges, as they already face liquidity constraints within the banking system.
To provide some relief, the RBI reduced the cash reserve ratio (CRR) in its December meeting and has recently increased cash injections through repo operations. Despite these efforts, banks are calling for further measures, citing slowing deposit growth and economic uncertainty.
As of December 27, deposit growth in the banking system stood at 10.2% year-on-year, lagging behind credit growth of 12.4%, according to RBI data.
Banks are also expected to request that the funds already allocated for the CRR be considered as part of the LCR requirement, reducing the additional liquidity they need to maintain, the sources said. An email to the CII went unanswered, while the RBI has not responded to a request for confirmation of the meeting.
When announcing the guidelines, the RBI proposed an additional 5% run-off rate for retail deposits linked to online and mobile banking, citing the risk of sudden withdrawals. This measure aims to prevent scenarios similar to the 2023 collapse of Silicon Valley Bank.
To comply with the higher LCR requirements, banks would need to increase their holdings of highly liquid assets, such as government securities, which can be quickly sold if needed. According to a July report by ratings agency ICRA, banks may need to purchase up to ₹4 trillion ($46 billion) in government bonds to meet these new requirements.
LCR regulations mandate that banks maintain sufficient liquid assets to cover 30 days of potential cash outflows, ensuring financial stability during periods of stress.
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