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The Reserve Bank of India’s (RBI) latest draft guidelines, which aim to enhance banks’ liquidity management amidst rising digital transactions, have been deemed credit-positive by Moody’s. The preliminary guidelines, released last month, propose that banks allocate an additional 5% reduction in the stability of retail deposits with internet and mobile banking access.
According to Moody’s, these new liquidity norms will lead to a decrease of approximately 15 percentage points in banks’ Liquidity Coverage Ratios (LCR). LCR is a critical liquidity requirement that mandates banks to maintain a proportion of high-quality liquid assets, such as cash, central bank reserves, and government bonds, which can be quickly converted to cash if needed.
Despite the anticipated reduction in LCR, Moody’s views the tighter norms as beneficial for banks’ credit profiles. The guidelines are expected to bolster banks’ resilience against sudden deposit outflows and enhance their liquidity buffers. At the system level, retail and small business deposits account for around two-thirds of total deposits, with more than 50% being enabled through internet and mobile banking.
The extent of the LCR reduction will vary depending on the proportion of retail and small business deposits with IMB facilities. State-run Bank of Baroda has projected a 12-15 percentage point drop in its LCR from the current 138%, according to its CEO. Moody’s anticipates that banks will moderate credit growth in anticipation of the new regulations, which will be implemented on April 1, 2025, thereby improving their credit-to-deposit ratios.