RBI's Regulatory Postponement and its Impact on Banks

Reserve Bank of India (RBI) Governor has announced a delay in implementing new regulations concerning project finance provisions, liquidity coverage ratio (LCR), and expected credit loss (ECL). This decision has been welcomed by banks, providing them with relief amidst challenges like tight liquidity, shrinking margins, and rising unsecured bad loans.

Reasons for the Delay

• RBI's governor emphasized a consultative approach to minimize disruption to the financial system.
• Banks now have more time to focus on business growth over the next year.
• Delay allows banks to better prepare for ECL implementation by refining their systems and analyzing legacy loans.

Specific Guidelines Affected

• Liquidity Coverage Ratio (LCR)
  • Draft circular released in July 2024 proposed an additional 5% run-off factor for retail deposits with internet and mobile banking facilities.
  • Less-stable deposits were assigned a 15% run-off factor.
  • Implementation was scheduled for April 1, 2025.
• Project Finance Provisions
  • Draft guidelines from May 2024 required phased provisions, starting at 2% in fiscal 2025 and reaching 5% by 2027.
  • The provisions significantly increased from the current 0.4% for project loans.

Industry Reactions

• Analysts observed the need for a larger timeframe to assess impacts on bank profitability and asset quality.
• Concerns were raised about the potential increase in interest costs and capital requirements under the new norms.

Conclusion

Governor Malhotra's non-disruptive approach has provided immediate relief to the banking sector. Banks are now gearing up to provide constructive feedback, ensuring future regulations do not hinder growth and profitability.