Banks want RBI to relax liquidity buffer norm relating to institutional deposits

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Against the background of the ongoing structural change in deposit composition, banks are urging the Reserve Bank of India to ease the so‑called ‘run‑off factor’ applied to institutional deposits within the Liquidity Coverage Ratio (LCR) framework, enabling them to free up more funds for lending.

This structural shift describes how savers, seeking better returns, are moving money into instruments like mutual funds, which subsequently place those funds with banks.

Under the LCR rule, banks must hold sufficient high‑quality liquid assets (HQLAs) to cover net cash outflows over a 30‑day stress scenario. The ratio stands at 100 %, and as of March 2026 scheduled commercial banks reported a strong liquidity position, posting an LCR of 123.70 %.

The run‑off factor — indicating the share of deposits a bank anticipates could be withdrawn or moved during stress — is set at 100 % for funds sourced from banks, insurers, other financial institutions, and entities engaged in financial services. This leaves banks with little excess liquidity for lending.

By contrast, retail deposits (those without internet or mobile banking) carry a run‑off factor of only 5 %. Consequently, for every ₹100 of retail deposits raised, banks need to set aside just ₹5 in HQLAs such as government securities.

After accounting for statutory requirements like the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) — presently 3 % and 18 % of deposits — banks retain roughly ₹74 out of each ₹100 for lending.

A private‑sector bank chief remarked, “The wholesale shift in deposits is quietly altering industry balance sheets. As funds move from retail savers to institutional investors, banks must hold considerably more high‑quality liquid assets — 100 % LCR for institutional deposits compared with just 5 % for retail deposits.”

Structural drag

“It acts as a structural drag, tying up liquidity and leaving little scope for genuine lending,” he added, stressing that the factor ought to be recalibrated downward.

He emphasized that if the RBI and the government desire banks to fund growth, they first need to free up bank balance sheets.

The treasury head of a private‑sector bank observed that a measured cut in CRR, SLR and LCR would instantly unlock substantial lendable resources.

“The sector isn’t seeking concessions; it’s asking for the liberty to deploy more capital into the real economy,” he said.

Published on June 9, 2026