Indian banks seek easing of proposed RBI norms on retail deposits

 The Indian Banks Association will soon ask the Reserve Bank of India to relax proposed norms on lenders maintaining additional funds against certain retail deposits. The IBA, in its representation, will also push for a phased and deferred implementation of these requirements, said people close to the development. Seven people confirmed the development.

Proposed Runoff Requirement Sparks Concern

In July, RBI came out with a discussion paper that prescribed an additional 5 per cent runoff requirement on retail deposits facilitated with internet and mobile banking facilities. This was done to enhance the liquidity stability of banks. It invited comments on the draft till August 31 and proposed to implement the new regulations from April 2025.

However, the IBA is likely to seek more time for furnishing comments. "The process is taking some time," said a senior official privy to the developments. The association is also likely to suggest the reduction of the proposed runoff percentage to 2 per cent or at most 3 per cent, against 5 per cent suggested by the RBI. "A 5 per cent runoff is not implementable and would have to be introduced in stages, not in one go," the treasury official said.

Impact on Banks' Liquidity Coverage Ratio

The runoff requirement, if implemented, would incentivise significant withdrawals and ensure banks bleed badly on LCR. As mentioned above, the liquidity coverage ratio mandates maintaining a portion of deposits in cash, the central bank's reserves, and government bonds. The proposed norms of the RBI, if applied in their present avatar, could trigger a rush among banks to buy government bonds. Market estimates of additional demand for bonds range from Rs 2 trillion to Rs 4 trillion.

Proposal to Include CRR in Liquidity Coverage

In response, IBA is also likely to recommend that the RBI allow cash parked with it under the cash reserve ratio to be included for calculating the liquidity coverage requirements of banks. The move would reduce the pressure on banks to meet the new liquidity requirements.