RBI's new liquidity norms expected to boost bank lending by ₹3 lakh crore
The Reserve Bank of India's final liquidity coverage ratio norms for banks are expected to free up ₹2.7-3 lakh crore in funds for lending, economists said.This is a significant boost for banks struggling to raise deposits and will support the economy though cheaper and more credit, they said.
"With an estimated high-quality liquid assets (HQLA) of almost ₹45-50 lakh crore for the banking system, this could free up lendable resources by almost ₹2.7-3 lakh crore and support the credit growth of the banks," said Anil Gupta, ICRA's senior vice president and co-group head of financial sector ratings.RBI has mandated banks to keep an additional 2.5% liquid assets against retail and small deposits raised through internet and phone banking. This ratio is called "run-off factor". The move is aimed at mitigating risk arising from a likelihood of substantial and quick online withdrawals.
The draft norms had proposed an additional 5% run-off factor for retail deposits. This was over and above the existing 5% run-off factor for stable deposits and 10% run-off factor for less stable deposits raised through digital channels.
According to RBI's calculations, the reported LCR of the banking system would improve by 6 percentage points as on December 31, 2024."This headroom can be equivalent to 1.4-1.5% of additional credit growth potential for the banking system," Gupta said.Bank credit grew 11% year-on-year to Rs 18.2 lakh crore as on April 4, 2025.
As LCR of banks would improve by 6 percentage points, intuitively this saving can be routed to credit, depending on the overall demand for loans, said Bank of Baroda chief economist Madan Sabnavis. "The final call will be taken by banks depending on their internal policies." Banks, which were looking to grow the share of medium-term to long-term deposits over the last couple of quarters in anticipation of stringent LCR from April this year, may now tweak their deposit mobilisation strategy in favour of raising short-term deposits, which has been the trend for several years, according to experts.
"From an industry standpoint, the RBI's final circular strikes a pragmatic balance between liquidity and profitability. It enhances the robustness of the liquidity framework without unduly constraining banks' ability to lend or generate returns," said Virat Sunil Diwanji, Federal Bank's national head for consumer banking. "The revised framework also aligns better with the evolving deposit landscape, especially in light of rising digitalisation and changes in depositor behaviour."
RBI data showed that 39.8% of total bank deposits for all scheduled banks combined were in the less-than-one-year bucket as of March 2024. Deposits with maturity between one year to up to three years constituted 24.7%, while 9.9% were in the three-to-five-year category, and 25.6% were of more than five-years maturity.
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