Central Bank’s new framework can shave 10-30 percentage points off bank LCRs

MUMBAI: The proposed higher mark-ups that the Reserve Bank is seeking from banks in the draft liquidity coverage ratio (LCR) framework will impact the LCRs by 10-30 percentage points (pps), thus reducing the cushion now available with banks over the regulatory requirement of 100 percent such ratio. In an analysis of 31 banks, Crisil ratings shows aid the near-term impact on credit growth and net interest margins is the price for enhancing resilience.

The Central Bank issued the new draft LCR guidelines on July 25 which it wants to be effective from April next. The draft guidelines propose to introduce three key changes to the LCR calculation. First, assigning an additional 5 percent run-off factor on the internet and mobile banking (IMB)-enabled retail deposits and certain small business deposits.

Secondly, it wants to restrict the value of government securities (G-secs) forming a part of level 1 high-quality liquid assets (HQLAs) to the market value, adjusted for applicable haircuts, in line with the margin requirements under the liquidity adjustments facility and the marginal standing facility.

Thirdly, it wants to treat deposits contractually pledged as collateral to a bank as callable, and hence included in the LCR math. These measures, the regulator believes, can enhance the resilience of banks against sudden and unanticipated deposit outflows.