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A stringent measure to comply on LCR of banks

The RBI has introduced a draft guideline, effective in FY2026, which would require banks that have a higher share of internet and mobile banking customers to hold more granular deposits than before. As per the last available data, all banks would have an 8-15% point impact on the current LCR ratio, but would still be compliant with the current guidelines.

Increasing the share of retail/stable deposits for LCR calculation

The RBI has introduced a draft guideline, which revises the current LCR framework. This guideline would be applicable from April 1, 2025. The key changes include: (1) an additional 5% run-off factor for retail deposits, which are enabled with internet and mobile banking facilities and less stable deposits enabled with IMB shall have a 15% run-off factor; (2) unsecured wholesale funding provided by small business customers to be treated like retail deposits; (3) level 1 HQLA would be valued at prevailing market values; and (4) specific types of deposits (deposits pledged as collateral) shall be classified as callable deposits.

8-15% impact looks to be the early assessment of this guideline

A simplified calculation based on public documents suggests that there could be an 8-15% impact on the current LCR ratios. We are able to assess the potential impact of the first change to the guideline, but we have very limited data to assess the other changes. The impact is higher for banks with a higher LCR ratio, as we are also building a higher run-off based on the new guidelines.   

Expect industry participants to slow, if needed, to comply faster

At the outset, we are not too sure if the guideline could address the challenge faced by a bank when there is a high, rapid and/or unexpected outflow of its deposits. However, the regulation would force banks to rely a lot more on granular and stable deposits, which would inherently act as a deterrent to fast growth. As the impact is at an industry level, we would want to believe that the compliance would be less disruptive in nature. This would imply that the choices would be more toward slowing down growth while keeping NIMs closer to the current levels rather than increasing deposit rates to mobilize the additional deposits. The latter is unlikely to achieve its desired outcome for any single player, as all banks would respond to any change in interest rates. At the system level, NIM is the mainstay source of revenues, and hence, we would expect banks to pass on any additional cost, if any, for this transition.

Which is better: Lower LCR but better quality of deposits or vice versa

A different perspective to look at this issue: all banks, barring a few, have an LCR that is higher than 120%. After the change, this declines to ~110%. Consequently, banks would have a lower ratio but a balance sheet that is superior to the previous guidelines on the quality of deposits. We would have to ponder what could be a better outcome. Banks can rebuild to a higher ratio over time rather than looking to comply immediately in 1QFY26 as they would need ~3-4% points of retail deposits in this challenging deposit mobilization period.

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