New LCR norms could help banks expand credit by 7%

Core Insights - The revised Liquidity Coverage Ratio (LCR) norms, effective from April 1, are expected to provide banks with additional room to expand credit by approximately 7%, assuming a steady deposit growth rate of 10% [8] - The shift towards an LCR-based framework will allow banks to deploy surplus liquidity currently held in low-yielding assets into loans, potentially increasing loan-to-deposit ratios (LDRs) by 3-12% across the brokerage's coverage universe, with public sector banks (PSBs) being the primary beneficiaries [8][9] - Large private banks are projected to see a smaller increase in LDRs of 4-11%, while PSBs could experience gains of 6-11%, reflecting their stronger liquidity buffers [9] LCR and Lending Capacity - As long as banks maintain an LCR cushion above the regulatory minimum, excess liquidity can be redeployed into loans without needing additional deposit mobilization, thereby supporting credit growth [3][9] - Analysts from Macquarie Capital noted that the LDR constraint is less of a concern for banks like State Bank of India (SBI), which currently maintains an LCR of around 138%, allowing for a potential increase in LDR by 300-400 basis points without breaching LCR requirements [9] - The Net Stable Funding Ratio (NSFR) framework is also seen as a lever for lending expansion, with better balance-sheet management potentially lifting LDRs by 3-23%, particularly benefiting PSBs due to their stronger stable funding buffers [9] Future Outlook - As Indian banks increasingly operate under these liquidity frameworks, concerns regarding high loan-to-deposit ratios constraining lending growth are expected to gradually ease, allowing credit growth to potentially outpace deposit growth over time [7][9] - Motilal Oswal has assumed a minimum LCR threshold of 108% for banks, with new guidelines expected to raise the system-level LCR by about 6 percentage points, leading to an effective LCR of around 115% [7][9] - Any liquidity above this effective LCR level could be utilized for loans, which typically offer higher yields compared to liquid assets [9]