MUMBAI: In a big relief to banks which have been facing liquidity issues, the Reserve Bank has put off the implementation of the new a tighter liquidity coverage ratio (LCR) to April 1, 2026 apart from easing the present norms on the run-off rates to 2.5% for internet and mobile banking enabled retail and small business customer deposits and for wholesale funding from other entities to a lower 40% from 100% currently.
The RBI move comes amidst the slowing credit growth and slower deposit accretion and had it been implemented as planned it would led to further slowdown in both liabilities and assets side, feared banking players as analysts pointed out that tighter LCR norms would have forced banks to prioritize holding high quality liquid assets and not credit growth.
The Reserve Bank had issued a draft circular on July 25, 2024 on Basel III framework on liquidity standards–liquidity coverage ratio–review of haircuts on high quality liquid assets and run-off rates on certain categories of deposits, proposing certain amendments to the LCR framework.
After analyzing the feedbacks from stakeholders the RBI on Monday issued the final guidelines under which “a bank shall assign additional run-off rates of 2.5% to Internet and mobile banking-enabled retail and small business customer deposits; and also adjust the market value of government securities with haircuts in line with margin requirements under the liquidity adjustment facility and marginal standing facility.
“In addition, the final guidelines also rationalise the composition of wholesale funding from other non-financial legal entities like trusts (educational, charitable and religious), partnerships, LLPs etc., shall attract a lower run-off rate of 40% as against 100% currently,” the regulator said in a circular.
On the impact of these measures (based on the data submitted by banks as of end-December 2024) is estimated that “the net impact of these measures will improve the systemwide LCR by around 6 percentage points as on that date.”
The Reserve Bank is sanguine that these measures will enhance the liquidity resilience of banks, and further align the guidelines with the global standards in a non-disruptive manner, it said, adding “to give the banks adequate time to transition their systems to the new standards for LCR computation, the revised instructions shall become applicable from April 1, 2026.”
The liquidity coverage ratio is a regulatory requirement for banks and is part of the Basel III framework. It mandates banks to maintain a sufficient stock of high-quality liquid assets to meet potential net cash outflows over a 30-day period, even under stressed conditions. The LCR aims to enhance the short-term resilience of banks to liquidity disruptions.
A higher LCR ensures banks can meet their short-term obligations during a liquidity crisis. It is calculated by dividing the total value of a bank's high-quality liquid assets (such as cash, central bank reserves, and government securities) by its projected total net cash outflows over a 30-day period.
The RBI initially set the minimum LCR requirement at 60% and gradually increased it to 100% from January 1, 2019.
On February 7, the governor Sanjay Malhotra had said the new LCR framework would be put off by at least a year. Malhotra had also put off the stricter provisioning for project finance.