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