RBI Issues Draft Liquidity Coverage Ratio Norms

The Reserve Bank of India (RBI) has released a draft circular outlining new norms under the Basel III framework, aimed at boosting the liquidity resilience of banks in India. These changes will require banks to maintain a higher amount of high-quality liquid assets (HQLA) as part of the Liquidity Coverage Ratio (LCR) which will help better protect depositors by ensuring banks can manage high withdrawal demands in stress situations.

Key Changes in LCR Framework

• Increased Run-Off Factors for Retail Deposits
  Banks will now assign an additional 5% run-off factor for retail deposits with internet and mobile banking (IMB) facilities. Stable retail deposits with IMB will have a 10% run-off factor, while less stable deposits will have a 15% run-off factor. This adjustment addresses the increased risk associated with the ease of digital banking withdrawals.
• Unsecured Wholesale Funding
  Unsecured wholesale funding from non-financial small business customers will be treated similarly to retail deposits, aligning with the new run-off factors.
• Valuation of Government Securities
  Level 1 HQLA in the form of government securities will be valued at their current market value, adjusted for applicable haircuts in line with RBI’s existing margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).
• Callable Deposits
  Deposits previously excluded from LCR computation, such as non-callable fixed deposits, will now be treated as callable if pledged as collateral to secure a credit facility or loan which will ensure such deposits are included in LCR calculations.

Impact and Implementation

The new norms, applicable to all commercial banks (excluding Payments Banks, Regional Rural Banks, and Local Area Banks), will come into effect on April 1, 2025. Currently, banks maintain an LCR of 130%, well above the RBI mandate of 100%.

Anil Gupta, Vice President and Co-Group Head Financial Sector Ratings at ICRA Ltd, highlighted the potential impact, noting that the penetration of digital banking would likely increase outflows in the next 30-day bucket for banks, thereby raising HQLA requirements. 

Conclusion: The RBI’s draft guidelines for the LCR framework reflect an approach to managing the risks associated with the rapid digitalization of banking services. By requiring banks to hold higher levels of liquid assets and adjusting run-off factors for digital deposits, the RBI aims to make sure that banks remain resilient in the face of potential liquidity stress situations, thereby safeguarding the interests of depositors.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.