A big relief has come for the banking sector as the RBI announced the final guidelines for liquidity coverage ratio (LCR) on Monday, 21 April 2025. Now the banks have to set aside a lower stock of liquid assets, that is, the run-off factor on retail deposits, which has been reduced from 10% to 7.5% as per the new liquidity coverage guidelines.
What is a Run-off factor, and what are the changes?
Earlier in June 2024, the RBI drafted a guideline where the run-off factor was proposed to be 10% on stable deposits and 15% on less stable deposits. Run-off factor here means in the banking industry, the changes of people suddenly withdrawing money from their accounts, which the bank couldn’t see coming.
Now the final guidelines say, the run-off factor on stable deposits will be 7.5% and 12.5% for the less stable deposits instead of 10% and 15% respectively, mentioned in the draft guidelines. So, this has boosted the banks sentiment.
So, basically the 5% extra to be levied as per the draft guidelines, has been reduced to 2.5% for the interest and mobile banking-enabled deposits (IMB).
New Norms for Wholesale Deposits
While the above run-off factor is for the retail deposits, here are the changes made for the wholesale deposits.
- Other Legal Entities’ Deposits such as charitable foundations, LLPs, proprietorship businesses and others will attract 40% run-off factor against the 100% run-off factor levied earlier.
- Corporate deposits will be attracting a 40% run-off factor as it is doing now
- Financial institutions such as IREDA, PFC will continue 100 run-offs as they need to be fully backed by liquid assets
Impact of the New Liquidity Coverage Guidelines
The new liquidity coverage guidelines will help the banks by reducing the additional liquid cash/assets the banks need to hold. While the IMB-enabled depositors are expected to be more prone to withdrawing their deposits, the overall liquidity buffer reduction can help the banks to grow further.
The banks will have more funds to offer more credit, which can earn them revenue via interest earnings. This in turn can boost the performance of the bank and thus help the investors earn higher returns.
Source: CNBC TV18
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