Synopsis

In the first quarter of FY27, revised liquidity coverage ratio (LCR) norms came into effect, reducing the assumed run-off rate on deposits from non-financial entities such as trusts, limited liability partnerships (LLPs), and partnerships to 40% from 100% earlier. The change lowered projected 30-day cash outflows for banks, providing flexibility to the LCR mandate.

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MUMBAI: A fresh rush of FCNR(B) deposits under the central bank's special swap window is expected to ease liquidity-buffer pressures on Indian lenders, with treasury heads saying the long-tenure deposits improve the metrics concerned by boosting funding without increasing expected 30-day outflows under regulatory norms.

In the first quarter of FY27, revised liquidity coverage ratio (LCR) norms came into effect, reducing the assumed run-off rate on deposits from non-financial entities such as trusts, limited liability partnerships (LLPs), and partnerships to 40% from 100% earlier. The change lowered projected 30-day cash outflows for banks, providing flexibility to the LCR mandate.

After being under pressure for five quarters, market experts expect the ratios to improve in coming quarters. In Q1FY27, HDFC Bank's LCR reduced 9 percentage points, while Union Bank of India's LCR reduced 10 percentage points YoY.

Most banks reported a decrease, except for Yes Bank and Kotak Mahindra Bank, which showed an increase by three and five percentage points, respectively.

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"The FCNR(B) deposits are LCR friendly, because they won't be counted in the 30-day outflows now, and will be counted at the time of their maturity in 3-5 years. So yes, these deposits will directly improve banks' LCR to some extent, depending on what assets they create," said Alok Singh, head of treasury, CSB Bank.

Safety Net
The LCR acts as banks' financial safety net, requiring them to maintain adequate easily sellable assets to cover 30 days of withdrawals.

As most FCNR(B) deposits are expected to be mobilised with a five-year tenor, the share of the five-year maturity bucket in banks' deposit profile is likely to increase in FY27, according to a report by State Bank of India. India has attracted $32 billion in FCNR(B) deposits so far, Reserve Bank of India (RBI) governor Sanjay Malhotra said in a media interview on Monday.

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Under special RBI swap frameworks, the FCNR(B) deposits with 3-to-5-year tenures carry a mandatory one year lock-in period with zero premature exits allowed in the first year. Post-lock-in, penalty on premature withdrawals varies from bank to bank.

"It will help improve LCR ratio because these deposits can't be recalled in the first year. But it also depends on where banks invest these funds. It will only help their LCR if they invest these funds in g-secs or other high quality liquid assets (HQLA) and not help if they create more credit," said Gopal Tripathi, head of treasury at Jana Small Finance Bank.

"The new norms did benefit overall LCR, and hence the dip in the ratio is not very large," Singh said.

Among other banks, ICICI Banks' LCR decreased by 4%, RBL Bank saw a dip by 19%. Bandhan Bank saw the highest dip in LCR by 66 percentage points.