The Reserve Bank of India’s latest draft guidelines to enhance banks’ ability to manage liquidity amid increasing digital transactions are credit positive, ratings agency Moody’s said. The central bank released a set of preliminary guidelines last month, suggesting that banks will be required to allocate an additional 5% reduction in the stability of retail deposits with internet and mobile banking access.
However, the guidelines are expected to lead to a fall of around 15 percentage points in banks’ liquidity coverage ratios (LCR), Moody’s added. LCR is a liquidity requirement for banks to maintain a certain proportion of high-quality liquid assets, including cash, reserves with central banks, and federal government bonds, which can easily be converted into cash when needed.
Moody’s noted that the proposed tighter liquidity norms are credit-positive because they will help improve banks’ resilience against unexpected outflows of depositors and enhance liquidity buffers.
“At the system level, retail and small business deposits make up around two-thirds of total deposits, and we expect more than 50% are IMB (internet and mobile banking)-enabled,” the rating agency said.
It added that the extent of reduction in LCR will depend on the proportion of retail and small business deposits enabled with IMB facilities. State-run lender Bank of Baroda expects its liquidity coverage ratio to fall by 12-15 percentage points from the current 138%, its CEO told Reuters.
“We expect banks to taper credit growth ahead of the measure’s proposed implementation on April 1 next year, which will improve their credit-to-deposit ratios,” Moody’s said.
