The Reserve Bank of India (RBI) has issued draft guidelines for revising the Liquidity Coverage Ratio (LCR) under the Basel III framework, focusing on haircuts on High Quality Liquid Assets (HQLA) and run-off rates on certain categories of deposits. This review refers to circular DBOD.BP.BC.No.120/21.04.098/2013-14, dated June 09, 2014, on ‘Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools, and LCR Disclosure Standards’ and associated guidelines.
Banking has undergone significant transformation in recent years, with increased technology usage facilitating instantaneous bank transfers and withdrawals. While this has enhanced convenience, it has also increased risks, necessitating proactive management. In light of these developments, the extant LCR framework for banks in India has been reviewed. The following decisions have been made to enhance the liquidity resilience of banks:
- a) Additional Run-off Factor for Retail Deposits: Banks shall assign an additional 5 percent run-off factor for retail deposits enabled with internet and mobile banking facilities (IMB). Consequently, stable retail deposits with IMB will have a 10 percent run-off factor, while less stable deposits with IMB will have a 15 percent run-off factor.
- b) Treatment of Unsecured Wholesale Funding: Unsecured wholesale funding provided by non-financial small business customers will be treated similarly to retail deposits, following the same run-off factors as mentioned above.
- c) Valuation of Level 1 HQLA: Level 1 HQLA in the form of Government securities shall be valued at an amount not exceeding their current market value, adjusted for applicable haircuts in line with the margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF), as described in RBI circular FMOD.MAOG No.125/01.01.001/2017-18 dated June 06, 2018, and amended from time to time.
- d) Treatment of Deposits Pledged as Collateral: Deposits that were previously excluded from LCR computation, such as non-callable fixed deposits, will now be treated as callable for LCR purposes if they are contractually pledged as collateral to a bank to secure a credit facility or loan. The provisions of paragraph 9 of circular DBR.BP.BC.No.86/21.04.098/2015-16 dated March 23, 2016, shall apply in such cases.
The amendments to specific instructions in the circulars dated June 09, 2014, and March 23, 2016, are provided in the Annex. This circular applies to all commercial banks, excluding payments banks, regional rural banks, and local area banks. These instructions will come into effect from April 01, 2025.
In summary, these revisions aim to address the evolving risks in the banking sector, driven by technological advancements, and to ensure that banks maintain adequate liquidity buffers to withstand financial stress. The proactive measures outlined in the guidelines will contribute to the overall stability and resilience of the Indian banking system.
