LIQUIDITY COVERAGE RATIO : ECONOMY
NEWS: ‘RBI’s LCR tweak
may hit credit growth, NIM’
WHAT’S IN THE NEWS?
RBI's Proposed Changes to Liquidity Coverage Ratio
(LCR) Norms
Understanding
the LCR:
- Measures a bank’s ability to
meet short-term liquidity needs during a crisis.
- Banks must hold a percentage
of High-quality Liquid Assets (HQLA) relative to short-term liabilities.
Proposed
Changes:
- Current LCR: 130% in Q4
FY24.
- New LCR: Reduced to
113%-116%, likely from April 1, 2025.
- Aim: Prevent crisis spread
and economic harm.
Short-Term
Impact:
Credit
Growth:
- Potential slowdown in credit
growth.
- Banks may become cautious in
extending credit.
- Tighter lending environment
for borrowers.
Net
Interest Margins (NIM):
- NIM represents the
difference between interest earned on loans and interest paid on deposits.
- Potential hit to NIM due to
reduced lending opportunities.
- Pressure on banks to
maintain profitability while holding more liquid assets.
Long-Term
Resilience and Business Strategies:
Banks’
Resilience:
- Enhanced resilience through
stronger liquidity positions.
- Better ability to weather
financial storms.
Private
Sector Banks:
- Greater impact expected.
- May need to rethink business
strategies.
- Potential reduction in
reliance on wholesale funding.
- Adjustment of credit growth
targets.
Deposit
Mobilisation:
- Banks with lower LCR (~120%)
may need to attract additional deposits.
- Alternatively, could slow
down credit expansion to manage liquidity.
Source: https://epaper.thehindu.com/ccidist-ws/th/th_delhi/issues/93144/OPS/GR6D4MK66.1+GMAD4OOUR.1.html