RBI liquidity rule shift may boost lending by up to 12%

The Reserve Bank of India (RBI) is shifting its primary focus in assessing bank liquidity from the traditional loan-to-deposit ratio (LDR) to more robust global standards under the Basel III framework—specifically the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)—potentially unlocking greater lending capacity for the Indian banking system. Analysts highlighted that this regulatory pivot, with key LCR amendments effective from April 1, 2026, will allow banks to deploy excess liquidity buffers more efficiently into credit rather than tying lending strictly to deposit mobilization. The changes include easing certain outflow assumptions while introducing targeted buffers, balancing short-term resilience with operational flexibility.

Under the revised LCR rules, banks will apply an additional 2.5% run-off buffer on digital (internet and mobile banking-enabled) retail deposits to account for faster potential withdrawals in stress scenarios. However, this is offset by significant relaxations elsewhere: the assumed withdrawal rate for certain wholesale deposits from trusts, limited liability partnerships (LLPs), and similar entities has been reduced from 100% to 40%, freeing up liquidity that was previously locked in high run-off assumptions. These adjustments are expected to improve the banking system's aggregate LCR by around 6 percentage points based on end-2024 data, while all banks continue to comfortably meet minimum requirements.

This move aligns with RBI's broader goal of enhancing liquidity resilience in line with global standards while avoiding disruptions to credit flow—particularly relevant amid ongoing economic pressures like high oil prices and geopolitical uncertainties. The phased approach and prior stakeholder feedback have ensured the changes are non-disruptive, giving banks ample transition time until the April 2026 rollout.