RBI Governor Sanjay Malhotra on Friday assured banks that they will be given sufficient time to implement the proposed regulatory changes pertaining to liquidity coverage ratio (LCR), expected credit loss (ECL) framework for provisioning by banks, and the prudential norms governing projects under implementation.

He emphasised that the central bank will ensure that the implementation of such regulations is smooth; giving sufficient time for transition and where regulations have major implications, the implementation will be carried out in a phased manner.

Malhotra specifically mentioned that LCR will not be implemented at least before March 31, 2026. The RBI’s draft circular on the Basel III Framework on Liquidity Standards — Liquidity Coverage Ratio (LCR) — had proposed April 1, 2025, as the effective date for implementation.

LCR promotes the short-term resilience of the liquidity risk profile of banks by ensuring that they have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30-day liquidity stress scenario.

ICRA, in a note last year, cautioned that the proposed changes in the LCR framework will further moderate the reported LCR and constrain credit growth for banks. Further, lending rates may need to rise by 10 basis points, while deposit rates would remain elevated, even if rate cuts commence.

“...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. I also want to reassure all stakeholders that we will continue the consultative process in regulation-making,” the Governor said.

He underscored that the suggestions of stakeholders are valuable and we will give serious consideration to them before taking any major decision.

When it comes to ECL, the rating agency noted that under the existing guidelines, banks make loan-loss provisions based on the “incurred loss” approach, but the ECL model considers the anticipation of default over the lifetime of an asset.

Referring to RBI’s draft project financing norms, Crisil Ratings noted that it proposes a significant increase in the prudential floor for standard assets provisioning (the existing requirement of 0.4 per cent of the funds outstanding is proposed to be increased to 5 per cent for under-construction projects).

It cautioned that the change in prudential floors without factoring the credit profile of the infrastructure asset may increase the interest cost for infrastructure projects across the board.

Published on February 7, 2025