The RBI issued a final circular on Monday titled “Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR) – Review of Haircuts on High Quality Liquid Assets (HQLA) and Run-off Rates on Certain Categories of Deposits.”
Bankers will heave a sigh of relief as the run-off rates to be applied to deposit outflows have been cut in the final version of the liquidity coverage ratio (LCR) framework, vis-a-vis the stiff prescriptions contained in the July 2024 draft circular.
The effect of the reduction in the run-off rates is that banks will have more lending resources to support growth. A higher run-off rate would have required them to invest more in high-quality liquid assets (HQLAs) such as Treasury Bills, government securities and state development loans.
What is the Liquidity Coverage Ratio (LCR)?
LCR promotes the short-term resilience of banks to potential liquidity disruptions by ensuring that they have an adequate level of unencumbered high-quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days. RBI has prescribed anks maintain an LCR of at least 100 per cent, effective January 1, 2019, on an ongoing basis.
During a period of financial stress, banks can use their stock of HQLA (such as Treasury Bills, Government Securities and State Development Loans), and LCR can dip below 100 per cent. Banks have to immediately report to RBI regarding the use of the stock of HQLA along with reasons for such usage and corrective steps initiated to rectify the situation.
What is the run-off rate?
The run-off rate means the proportion of deposits that may see outflows by way of withdrawal/ transfer during stressful situations.
What tweaks has RBI made in the final circular on “Basel III Framework on Liquidity Standards – LCR – Review of Haircuts on HQLA and Run-off Rates on Certain Categories of Deposits”?
The run-off rates assigned to retail deposits and deposits from ‘non-financial corporates’ for computing LCR have been reduced.
So, a bank has to assign an additional 2.5 per cent run-off factor (against the 5 per cent prescribed in the draft circular issued in July 2024) for retail deposits enabled with internet and mobile banking facilities (IMB).
Stable retail deposits enabled with internet banking (IMB) will have a 7.5 per cent run-off factor (10 per cent per the draft circular and 5 per cent applicable currently), and less stable deposits enabled with IMB will have a 12.5 per cent run-off factor (15 per cent per the draft and 10 per cent applicable currently).
Further, the “other legal entities” (OLE) category will consist of all deposits and other funding from banks/insurance companies & financial institutions and entities in the ‘business of financial services’ .
Thus, funding from non-financial entities such as trusts (educational/religious/charitable), Association of Persons (AoPs), partnerships, proprietorships, Limited Liability Partnerships, and other incorporated entities etc., will be categorised as funding from ‘non-financial corporates’.
Such entities will attract a run-off rate of 40 per cent (as against 100 per cent currently prescribed) unless the above entities are treated as small business customers (SBC) under the LCR framework.
What will be the effect of the aforementioned circular on banks?
As per RBI’s estimate, the reported LCR of the banking system will improve by 6% as of December 31, 2024. With an estimated HQLA of almost ₹45-50 lakh crore for the banking system, this could free up the lendable resources by almost ₹2.7-3.0 lakh crore and support the credit growth of the banks, according to Anil Gupta, Senior Vice President & Co Group Head – Financial Sector Ratings, ICRA. This headroom can be equivalent to 1.4-1.5 per cent of additional credit growth potential for the banking system.
How much do banks have to align with the circular?
The regulatory prescriptions in the circular are effective from April 1, 2026. The draft had mentioned the effective date of implementation as April 1, 2025. So, Banks have a year to adjust to the new regulations.
What is RBI’s take on the circular?
RBI says these amendments would help improve the liquidity resilience of banks in India and further align the guidelines with global standards while ensuring that such an enhancement is non-disruptive.
Published on April 22, 2025