Commercial banks have started applying higher outflow rates on retail deposits in preparation for the upcoming revisions to the liquidity coverage ratio (LCR) rules, which require them to purchase more high-quality liquid assets. The banking regulator is set to issue revised LCR rules to mitigate the risk emanating from mass withdrawals of deposits-an event that triggered the collapse of Silicon Valley Bank in the US.Although the Reserve Bank of India has not yet issued the final guidelines for the revised LCR regulations, banks said that they are likely to be effective April 1 next year.Axis Bank, which declared its second-quarter results last week, said its average LCR has fallen because it applied a higher outflow rate than that prescribed by the RBI. Its LCR was 115%, down 5 percentage points over the June quarter.114403728For HDFC Bank, the LCR rose in the second quarter to 128% from 123% in June. Supported by strong deposit growth and a slower increase in advances, HDFC Bank chose to increase the liquid assets and LCR ratio to absorb the expected adverse impact of the upcoming change to the regulations.The proposed rules direct banks to deploy more funds in high-quality liquid assets to prepare them for a mass withdrawal by depositors. These assets, mostly government securities, could be quickly liquidated in a hypothetical stress episode where lenders offering internet and mobile banking facilities face quick fund withdrawals or transfers. In its draft rules, the RBI said while increased use of technology facilitated instantaneous bank transfers and withdrawals, the new-age modes of banking also led to a concomitant increase in risks.The RBI said banks should assign an additional 5% run-off factor for retail deposits that are enabled with internet and mobile banking (IMB) facilities. Accordingly, stable retail deposits enabled with IMB shall have a 10% run-off factor. For less-stable deposits enabled with IMB, this would be 15%.Banks had suggested that the regulator impose an additional "run-off factor" of 2% to 2.25% against the 5% increase prescribed in a recent draft guideline, as reported by ET on September 3. Some banks also proposed a gradual increase over three years in maintaining the liquid stocks. Banks are less confident of the RBI significantly relaxing the LCR regulations and are therefore preparing for it.Analysts have estimated a potential increase in demand for short-term government securities by ₹4 lakh crore to ₹5 lakh crore if the new rules were implemented.For banks, the pain point from the proposed changes is the prevailing scenario of credit growing faster than deposit. At a time when banks are already competing to mobilise retail deposits, a fresh increase in reserve requirements translates into funds being invested in low-yielding government bonds. This exerts pressure on banks' lending ability as well as margins, industry officials said.