Indian banks reportedly asked RBI to delay April liquidity rules

(Bloomberg) — Some of India’s largest banks are planning to ask the country’s new central bank governor to make concessions on proposed liquidity regulations, according to people familiar with the matter, arguing the rules could hamper efforts to spur lending.

Banks plan to urge the Reserve Bank of India to delay the implementation of new liquidity coverage ratio norms, which are currently set to take effect on April 1, according to people who spoke on condition of anonymity discussing private matters. The request will be made through the Confederation of Indian Industry, which will meet recently appointed Reserve Bank of India Governor Sanjay Malhotra in the coming days, people familiar with the matter said.

Malhotra’s predecessor in July announced tighter norms requiring banks to keep most of their deposits in sovereign bonds as a buffer against sudden withdrawals in the era of digital banking. However, implementing these measures will add to the challenges faced by lenders already dealing with a cash crunch in the banking system.

To be sure, the Reserve Bank of India did cut the cash reserve ratio (the proportion of deposits banks must deposit with the central bank) at its December meeting and stepped up cash infusions through repo operations this month. Still, bankers are calling for more measures as deposit growth slows and economic growth slows.

According to the latest data from the central bank, as of December 27, deposits in the banking system increased by 10.2% year-on-year, lagging behind credit growth of 12.4%.

Lenders also plan to ask the Reserve Bank of India to treat funds already set aside for the cash reserve ratio as LCR, thereby reducing the funds needed to meet the new requirements, people familiar with the matter said. An email sent to the CBI did not receive an immediate reply, while the Reserve Bank of India did not respond to an email seeking confirmation of the meeting.

Read: RBI says it will consider bolder steps to ease cash crunch

While proposing the guidelines, the RBI asked banks to impose an additional 5% run-off interest on retail deposits with internet and mobile banking facilities. A run is the possibility that deposits are suddenly withdrawn, which could trigger a run like the one on Silicon Valley Bank in 2023.

Increasing the weight will require lenders to build larger cushions of assets that can be sold at short notice. However, for banks, meeting higher LCR demand will mean having to buy up to 4 trillion rupees ($46 billion) in government securities, ratings firm ICRA wrote in a July report.

Government securities are highly liquid assets that authorities consider eligible for calculating the LCR, which requires banks to maintain sufficient assets to cover cash outflows for 30 days.

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