Proposed tightening of banks’ liquidity norms credit positive: Moody’s

New Delhi, Aug 1 (PTI) The Reserve Bank’s proposal to tighten liquidity requirements for banks by modifying the calculation of liquidity coverage ratios is credit-positive for their 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 said in a statement on Thursday.

Last month, the Reserve Bank of India (RBI) proposed tightening liquidity requirements for Indian banks by modifying the calculation of their liquidity coverage ratios (LCR).

The draft guidelines proposed that the banks assign additional liquidity buffers for accounts having internet and mobile banking (IMB) facilities to stave off any risks during times of stress.

The draft guidelines followed an announcement by RBI Governor Shaktikanta Das in the April policy review that the high usage of technological tools in banking can lead to the moving of funds without physically queuing up at bank branches.

“While increased usage of technology has facilitated the ability to make instantaneous bank transfers and withdrawals, it has also led to a concomitant increase in risks, requiring proactive management,” the draft circular said.

Tighter liquidity norms are credit positive because they will help improve the resilience of banks against unexpected outflows of depositors, Moody’s said, adding that strong adoption of digital banking has made banks funding vulnerable to sudden outflows of funding.

Banks will also have to boost their holdings of high-quality liquid assets (HQLA) to maintain LCR, which will improve liquidity buffers, it noted.

“We expect banks to taper credit growth ahead of the measure’s proposed implementation on April 1 next year, which will improve their credit-to-deposit ratios. We expect that the proposed RBI regulations will result in around 15 percentage points lower LCR ratios,” it said.

The extent of reduction will depend on the proportion of retail and small business deposits that are enabled with IMB facilities, it added.

While the intensified competition for stable deposits could potentially elevate deposit costs and, along with restrained credit growth, impact profitability, Moody’s expects this will promote a more disciplined approach towards lending and deposit acquisition practices, it said.