Industry
Banks get breathing space as RBI defers key proposals to next year
Summary
A clutch of key regulations was to come into force in the next few months. These include asking banks to set aside a higher stock of liquid assets to meet a contingency like a potential bank run and a draft framework for lenders undertaking project finance.
MUMBAI : The Reserve Bank of India (RBI) has decided to defer certain regulations for banks, with governor Sanjay Malhotra saying that the regulator will give enough time and that it does not want to cause any disruption.
The decision is expected to come as a relief to bankers, who said that it would push credit growth.
A clutch of key regulations were to come into force in the next few months. These include asking banks to set aside a higher stock of liquid assets to meet a contingency like a potential bank run and a draft framework for lenders undertaking project finance with a phased increase in standard asset provisioning to 1-5% of loans from the current 0.4% on project loans.
While the liquidity coverage ratio (LCR) norms were supposed to take effect on 1 April, the guidelines on project finance were supposed to take effect a day earlier, albeit in staggered form.
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“I want to also clarify…we did make a mention that we will give sufficient time. I do not think 31 March 2025 is giving sufficient time. So, certainly, they will not be implemented at least before 31 March 2026," said Malhotra, who took over as the governor in December.
LCR proposals
Malhotra said that the draft regulations were circulated, and the regulator has received comments, which it is examining. The governor reiterated that liquidity is important for everyone, but the regulations around LCR were proposed to be tightened to prevent any run on banks in India.
“You would have witnessed in 2023 there was a run on some of the US banks because they do not have such regulations," he said.
LCR norms require banks to maintain a stock of high-quality liquid assets (HQLA), primarily government securities, to tide over a hypothetical situation of stress for 30 days in which deposits are withdrawn. In July 2024, the proposed guidelines mandated banks to keep higher liquidity for deposits made through digital channels, as they aren't very stable and tend to be withdrawn quickly.
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“We will give timeframes as to when one can expect LCR. Similarly, for the other guidelines, we will also give sufficient timeframes. You can rest assured that they will certainly not be implemented as quickly as 31.3.2025 because that will certainly not be sufficient time," said Malhotra.
Zarin Daruwala, chief executive India and South Asia, Standard Chartered Bank, said that the delay in implementing the revised LCR norms will likely boost credit delivery and lower lending rates.
Norms to be implemented, but later
Analysts were also buoyed by the deferment of some of the proposals. Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital, pointed out that the governor explicitly stated that the regulations would not be implemented before March 2026. “So that gives a good amount of breathing space. At the same time, he isn’t rescinding any norms—all will be done but with more relaxed timelines and phased implementation," Ganapathy wrote to clients in an email accompanying his note on Friday.
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Meanwhile, the RBI is internally reviewing an economic capital framework from 2019 that had recommended a range for RBI’s contingency fund. A committee headed by former governor Bimal Jalan recommended that RBI’s realized equity, a form of contingency fund for meeting all risks/losses primarily built up from retained earnings, be in the range of 5.5-6.5% of the balance sheet.
"The overall framework is being reviewed and (on the) basis (of) that if the committee feels there is any change, (it) could be upward or downward. I am not suggesting that because of uncertainties, it needs to be increased," said Malhotra.
RBI deputy governor Rajeshwar Rao said that the Jalan committee recommendations were for 2019 to 2024, and RBI is internally reviewing it to see whether any changes are warranted. “Then, internally, we will take it up appropriately through the process, and if we need to engage with the government or the board, we will do it later."
