RBI's Stricter Liquidity Rules: A Positive Shift for Banks' Resilience

The Reserve Bank of India's proposal to tighten liquidity requirements through modified liquidity coverage ratios is seen as credit-positive by Moody's Ratings. While the changes may curb credit growth and raise deposit costs, banks' profitability is expected to remain strong. The initiative aims to bolster banks' resilience against unexpected outflows.

The Reserve Bank of India (RBI)'s proposal to tighten liquidity requirements through changes in liquidity coverage ratios is a credit-positive move for banks' funding and liquidity, according to Moody's Ratings.

'Although the proposed liquidity requirements will reduce credit growth and increase the cost of deposits, we expect the sector's profitability to remain robust,' Moody's stated on Thursday.

Last month, the RBI proposed tightening liquidity requirements for Indian banks by amending their liquidity coverage ratios (LCR). The draft guidelines suggest additional liquidity buffers for accounts with internet and mobile banking (IMB) facilities to mitigate risks during stress periods.

The guidelines followed RBI Governor Shaktikanta Das's announcement in April, noting that increased use of technological tools could enable fund movements without physical bank visits, necessitating proactive risk management.

Tighter liquidity norms will help improve banks' resilience against unexpected outflows, Moody's noted, emphasizing that the strong adoption of digital banking makes funding vulnerable to sudden outflows. Banks will need more high-quality liquid assets (HQLA) to maintain LCR, thus strengthening liquidity buffers.

The guidelines, expected to be implemented on April 1 next year, may lead banks to taper credit growth, improving their credit-to-deposit ratios. With LCR ratios likely to reduce by around 15 percentage points, the impact will hinge on the proportion of deposits with IMB facilities.

While increased competition for stable deposits could elevate costs and impact profitability, Moody's anticipates a more disciplined approach to lending and deposit acquisition.

(With inputs from agencies.)