RBI Defers LCR Rules, Hints at Regulatory Shift

Mumbai, Feb 7 (PTI) In what can come as a huge relief to banks, Reserve Bank's new Governor Sanjay Malhotra on Friday announced that the liquidity coverage ratio implementation will be deferred by at least a year and assured that it will be implemented in a phased manner.

In his maiden interaction with the media after assuming office in December, Malhotra underlined that while financial stability is important, the "cost of regulations" will also be looked at by the central bank under his leadership so that there is an efficient use of resources.

Malhotra's predecessor Shaktikanta Das had adopted a more stern approach when it comes to regulatory actions with the focus on financial stability. Banks and some analysts had feared that many of these moves have or will throttle credit growth in the economy, which is already witnessing a slowdown in GDP expansion.

The RBI introduced drafts or papers on liquidity coverage ratio (LCR) which aim to insulate banks in a possible scenario of excessive withdrawal by depositors during crisis, increase the provisioning for project loans because of past experiences with such lending going sour, switching to expected credit loss (ECL) based provisioning rather than waiting for a set quantum of time, dissuading unsecured lending through rise in risk weights and also slapped restrictions through cease and desist actions for errant entities.

"We recognise that just like there are no free lunches, regulation to enhance stability and consumer protection too is not devoid of costs. There are trade-offs between stability and efficiency. We will keep this trade-off in mind while formulating regulations. It will be our attempt to strike the right balance, keeping in view the benefits and costs of each and every regulation," Malhotra said in a statement earlier in the day.

During a press conference after the announcement of monetary policy, he spoke on every such regulatory measure which the banks were unhappy about individually and explained the way ahead.

On LCR, which was supposed to kick in from April 1 this year, he said banks do not have sufficient time to implement it by March 31 this year.

"...they will not be implemented before at least before 31.03. 2026, that is the kind of timeline that is needed at the minimum," he added.


Feedback received on the draft regulations includes suggestions that lower buffers will also help, he said, assuring that the LCR framework will be implemented in phases.

On the ECL, Malhotra said it is only a discussion paper and that there is an overlap with project finance which also focuses on additional provisioning. He added that both the rules will not be implemented before March 31, 2026.

"We will come out with something which balances the interests of the public, the depositors, financial stability which is very very important for our country, and at the same time the concerns of the banks keeping in mind the efficient use of resources," he added.

Similarly, in the case of cease and desist moves like the one which has been taken against major entities like HDFC Bank or Kotak Mahindra Bank, the new governor said he believes such measures are the ones of "last resort".

"...we would not like to use them too often, to be used in the rarest of rare where all other measures have actually failed. We will keep this policy going forward," he added.

On the curbs on unsecured lending growth implemented through the increase in risk weights in November 2023, Malhotra said the RBI is "satisfied" with the impact that it has had wherein credit growth under the heads has slowed down, and added that he does not feel any more steps to moderate it further are merited at present.

Deputy Governor Swaminathan J also mentioned that there are no plans of any regulatory moves to check lending in the microlending as well, despite the heightened slippages in the sector.

Malhotra said the RBI was always taking the cost of regulations on board, and he only decided to articulate the same.

"I only made it very, very clear so that everybody is assured about that," Malhotra said, speaking about his move to articulate the cost of regulation.