The Reserve Bank of India (RBI) has issued its final guidelines on amendments to the Basel III Liquidity Coverage Ratio (LCR) framework, aimed at strengthening banks’ resilience to short-term liquidity shocks while aligning India’s standards more closely with global norms. These revisions, to take effect on April 1, 2026, refine run-off rates on certain deposits, recalibrate the valuation of high-quality liquid assets (HQLA) and reclassify funding categories.
Enhanced Run-off for Digital Deposits
Recognizing the potentially higher propensity for digitally enabled depositors to withdraw funds swiftly, the RBI has introduced an additional 2.5% run-off surcharge for retail deposits accessible via internet and mobile banking (IMB). Stable retail deposits with IMB will now carry a 7.5% outflow rate (up from 5%), while less-stable IMB-enabled deposits will attract a 12.5% rate (up from 10%). Unsecured wholesale funding from non-financial small business customers will mirror these retail deposit factors, reflecting similar behavioral profiles.
Haircuts on Level 1 HQLA
Level 1 HQLA in the form of government securities will henceforth be valued at no more than their current market price, subject to haircuts consistent with the RBI’s Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) margin requirements. By harmonizing LCR haircuts with existing LAF/MSF norms, the RBI seeks to ensure that banks hold genuinely liquid government securities that can be mobilized without material valuation loss.
Callable Treatment of Pledged Deposits
To close a loophole in which certain non-callable fixed deposits were excluded from LCR outflows when pledged as collateral, the new guidelines stipulate that any deposit pledged to secure a credit facility—regardless of its original callability—must be treated as callable for LCR purposes. The existing conditional framework for excluding pledged deposits (e.g., legally enforceable pledge agreements and maturity beyond 30 days) will continue to apply, but the deposit’s callability status will be reset.
Reclassification of “Other Legal Entities”
The RBI has narrowed the definition of “other legal entities” (OLEs) under unsecured wholesale funding to include only banks, insurance companies, financial institutions and entities in the financial services business. Deposits from non-financial entities—such as trusts, associations of persons, partnerships, proprietorships and LLPs—will now be treated as funding from non-financial corporates and attract a 40% run-off rate, rather than the 100% rate previously applied to all OLE deposits. Exceptions remain for small business customers treated as retail under the LCR framework.
Implications and Implementation
These amendments are intended to bolster banks’ liquidity resilience in India by more accurately capturing potential outflows and ensuring HQLA valuations reflect true market liquidity. Banks must update their liquidity risk models, data systems and disclosure templates well ahead of the April 2026 deadline. While these changes may modestly increase reported outflows and reduce usable HQLA, they are calibrated to avoid undue market disruption and to keep India’s banking sector aligned with evolving international best practices.
