RBI Eases Final LCR Guidelines: A Big Win for Indian Banks

The Reserve Bank of India (RBI) has released its final guidelines on the Liquidity Coverage Ratio (LCR), and the changes are far more relaxed than what was proposed in the earlier draft. This move is expected to boost the liquidity position of Indian banks and support overall growth in the sector.

What is Liquidity Coverage Ratio (LCR)?

LCR is a regulation introduced to ensure that banks have enough high-quality liquid assets (HQLA) to survive a 30-day period of financial stress. These assets must be sufficient to cover potential cash outflows during tough times. LCR helps maintain financial stability and prevents liquidity crises in the banking sector.

What’s New in the Final Guidelines?

The final LCR framework, announced by the RBI, is a significant relaxation compared to its earlier draft. It lowers the estimated percentage of deposits expected to be withdrawn during financial stress — called run-off factors — for several categories, including retail and non-financial business deposits.

Key Changes in the LCR Rules

Trust, Partnership & Proprietorship Deposits: Run-off factor has been reduced from 100% to 40%.

Digital Deposits: These now carry a run-off factor of zero, unlike the earlier draft which had suggested a higher outflow rate.

Government Securities (G-Secs): A tighter valuation method has been introduced for better accuracy.

These softer norms mean that banks will have to maintain fewer liquid reserves than previously expected, freeing up a significant amount of cash.

Implementation Timeline Extended

Another major relief is the new deadline for implementing the revised LCR requirements. Banks now have time until April 1, 2026, instead of the earlier April 1, 2025. This extra year gives them more room to adjust their strategies and balance sheets.

Positive Reactions from Analysts and Brokerages

The final guidelines have received a thumbs-up from top financial analysts and global brokerages.

Morgan Stanley

Morgan Stanley called the new LCR rules a “material positive” for the banking system. The brokerage expects a 600 basis point (6%) improvement in the system-wide LCR. It also believes that banks with higher exposure to trust deposits — though data on this isn’t publicly available — will benefit the most.

HSBC

According to HSBC, the relaxed guidelines could release up to Rs 2.2 lakh crore in liquidity across banks. This extra liquidity can be used for more loans, better deposit offers, and improved net interest margins (NIMs). HSBC sees this move as “substantially positive,” especially for banks with high deposit outflows.

Jefferies

Jefferies highlighted that the new LCR rules are more lenient than both the original and draft versions. The firm estimates that the new norms could lead to a liquidity swing of Rs 10 lakh crore — due to reduced consumption of Rs 3–3.5 lakh crore versus Rs 6–7 lakh crore under the draft plan. It believes public sector banks and large private lenders will benefit most from the new framework.

Nuvama

Nuvama believes the relaxed rules favor banks like Kotak Mahindra Bank, IndusInd Bank, and Federal Bank. Kotak, in particular, has been actively mobilizing wholesale deposits and offering competitive interest rates, making it a big winner from the revised run-off rates.

Boost for the Banking Sector

The timing of these changes couldn’t be better. On the same day the guidelines were released, the Nifty Bank Index hit an all-time high, driven by strong performances from ICICI Bank and HDFC Bank, which also touched record highs.

The new LCR rules add to the positive sentiment in the banking space, offering more flexibility and improving profitability. By reducing the cost of maintaining liquid assets, banks can now focus more on lending and expanding their operations.

RBI’s Broader Goal: Ensuring Liquidity

Since February, the RBI has been cutting interest rates with the aim of ensuring that the lower rates are passed on to businesses and consumers. With these relaxed LCR guidelines, the central bank is injecting even more liquidity into the system.

Overnight borrowing costs for banks have remained below the policy repo rate throughout the month, marking the longest such streak since November. Lower money market rates and a softer government bond yield curve are also helping reduce the overall cost of funds across the economy.

Conclusion

The RBI’s final guidelines on the Liquidity Coverage Ratio represent a major shift in the regulatory environment for banks. With relaxed norms, more time to comply, and added liquidity, Indian banks are now in a better position to grow, lend, and improve their margins. The sector is likely to see continued optimism in the coming months, making this a crucial policy change for the entire financial ecosystem.