RBI Postpones LCR Regulations by One Year, Easing Pressure on Banks
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Synopsis
In a major relief for banks, RBI Governor Sanjay Malhotra has announced a one-year delay in the implementation of the Liquidity Coverage Ratio (LCR) and project financing norms, now set to take effect no earlier than March 31, 2026.
Key Takeaways
- RBI defers LCR norms by a year
- New implementation date is March 31, 2026
- Concerns raised by banks regarding liquidity crisis
- Impact on credit flow in the economy
- RBI aims for smooth financial transition
Mumbai, Feb 7 (NationPress) In a significant reprieve for financial institutions, RBI Governor Sanjay Malhotra revealed on Friday that the rollout of the anticipated Liquidity Coverage Ratio (LCR) and project financing regulations will be postponed by one year, with a new implementation date set for no earlier than March 31, 2026.
Malhotra stated that this decision was made because the initial deadline of March 2025 did not provide adequate time for the effective enactment of these guidelines. The RBI aims to avoid any disruptions within the financial system and intends to facilitate a seamless transition.
Both public and private sector banks had expressed opposition to the enforcement of these regulations, which were initially proposed by former RBI Governor Shaktikanta Das, citing fears that they would trigger a liquidity crisis. Following Das's departure, bank executives raised their concerns with Malhotra shortly after he assumed the role of RBI Governor.
Originally, these regulations were expected to be effective from April 1, 2025. According to bank treasury officials, the enforcement of the LCR would necessitate the diversion of over Rs 4 lakh crore from banks to acquire government bonds, thereby limiting their capacity to extend credit to businesses and individuals, which is essential for stimulating economic demand and growth.
In the final week of January, the RBI reached out to banks to assess the potential impact of the new liquidity coverage regulations, amid concerns that they could negatively affect credit flow within the economy.
Banks had requested a postponement of the regulations along with alternative strategies to mitigate the anticipated adverse effects on their operations.
Despite the daily variable repo rate auctions initiated by the RBI to infuse liquidity into the system, banks were already grappling with a constrained liquidity environment.
On July 25, the RBI had issued a draft circular requiring banks to allocate additional funds to address their risks starting this year.
The central bank noted that the banking landscape has rapidly evolved in recent years. While advancements in technology have enabled instantaneous banking transactions, they have also increased risks, necessitating proactive management; thus, the RBI reviewed the Liquidity Coverage Ratio (LCR) framework to bolster bank resilience.
Banks were instructed to allocate an additional 5 percent of funds as a runoff factor for retail deposits supported by internet and mobile banking (IMB). Stable retail deposits enabled by IMB are to have a 10 percent runoff factor, while less stable deposits will have a 15 percent runoff factor.
The LCR mandates that banks maintain ample high-quality liquid assets (HQLAs), primarily consisting of government securities, to navigate potential liquidity challenges arising from sudden fund withdrawals. The RBI declined banks' requests to include their existing cash reserve ratios in the calculation of HQLAs.
Banks also communicated with the Finance Ministry regarding the necessity of relaxing the stringent RBI guidelines, which could hinder credit growth.
