Bank stocks jump up to 2% as RBI eases final LCR norms, offers relief to lenders

Banking stock jumped up to 2% on Tuesday after the Reserve Bank of India (RBI) on Monday released the final guidelines on the Liquidity Coverage Ratio (LCR), offering relief to banks through more lenient rules than initially proposed.

Indian Overseas Bank shares jumped 2% to an intraday high of Rs 39.10 on the BSE, while the shares of Canara Bank and Federal Bank surged by 1.7% each to a high of Rs 100.69 and Rs 205.50 respectively.

Meanwhile, the shares of Bank of Baroda and Kotak Mahindra Bank surged by 1.3% and 1.4% respectively.

The LCR norms, aimed at mitigating risk arising from a likelihood of substantial online withdrawals, mandate banks to set aside more money in high-quality liquid assets (HQLAs).

“Reserve Bank is sanguine that these measures will enhance the liquidity resilience of banks in India, and further align the guidelines with the global standards in a non-disruptive manner,” it said, adding that final rules will kick in from April 2026.

The final norms mandated an additional ‘run-off’ factor of 2.5% for retail and small business customer deposits that can be accessed via internet and mobile phone (IMB) banking. The draft norms had proposed 5% for retail deposits. The run-off factor implies the percentage of deposits withdrawn by a depositor in the event of US-based Silicon Valley Bank-like disruptions.

This simply means that now banks will have to set less money that what they would have to do if the draft norms, released in July, were implemented without any modifications.

Accordingly, stable retail deposits enabled with IMB will have a 7.5% run-off factor, while less stable deposits enabled with IMB would have a 12.5% run-off factor. That compares with 5% and 10%, respectively, now.

Rating agency ICRA had estimated an adverse impact of 14-17% on the reported LCR based on the draft guidelines. According to ICRA, with an estimated HQLA of almost Rs 45-50 lakh crore for the banking system, this could free up the lendable resources by almost Rs 2.7-3.0 lakh crore and support the credit growth of the banks.

"This headroom can be equivalent to 1.4-1.5% of additional credit growth potential for the banking system," said Anil Gupta, Senior Vice President - Financial Sector Ratings, ICRA.

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In the final guidelines, the central bank has also rationalised the composition of wholesale funding from ‘other legal entities’. Consequently, funding from non-financial entities like trusts (educational, charitable and religious), partnerships, LLPs, etc. shall attract a lower run-off rate of 40% against 100% currently.

The draft issued by the RBI in July had proposed implementation of the rules from April 2025. However, the RBI Governor Sanjay Malhotra had said in February that a clutch of revised regulations, including the LCR framework, will not be implemented in hurry.

LCR refers to the stock of HQLAs, primarily government securities, that banks must maintain to tide over a hypothetical 30-day stress scenario in which such outflows occur.

Based on the July draft, it is estimated that banks will need to buy additional government securities worth ?4-6 lakh crore as HQLAs if the LCR norms are implemented without modification.

On Monday, the central bank said that it has undertaken an impact analysis of the final norms measures based on data submitted by banks, as of December 31, 2024.

“It is estimated that the net impact of these measures will improve the LCR of banks, at the aggregate level, by around 6 percentage points as on that date. Further, all the banks would continue to meet the minimum regulatory LCR requirements comfortably,” it said.

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