Basel III Liquidity Coverage Ratio (LCR) Guidelines
Explaining changes and implications for Indian banks
Reference Notification
For full details, please refer to the RBI's official notification: RBI Notification : Amendments to Liquidity Coverage Ratio (LCR) Framework dated 21.04.2025
What is LCR and Why Is It Important?
The Liquidity Coverage Ratio (LCR) is a Basel III standard requiring banks to hold enough High-Quality Liquid Assets (HQLA) to survive a 30-day stress scenario. It ensures short-term liquidity resilience.
Key Terms
- High-Quality Liquid Assets (HQLA): Quickly convertible to cash without significant loss.
- Run-off Rate: Estimated outflow percentage in a stress event.
- Stable vs. Less Stable Deposits: Depends on depositor access and behavior (e.g., via mobile apps).
- Haircut: Discount applied to asset value for risk adjustments.
Comparison of Draft vs Final Guidelines
| Aspect | Draft Guidelines (25 July 2024) | Final Guidelines (21 April 2025) | Why This Change? |
|---|---|---|---|
| Run-off rate for Internet/Mobile Banking (IMB) retail deposits | Additional 5% (total 10% or 15%) | Additional 2.5% | 5% seen as high, reduced for better balance. |
| Small Business Customer Deposits | Treated like retail with 5% add-on | Same 2.5% add-on as retail | Behaviorally similar to retail; aligned. |
| Valuation of G-Secs (Level 1 HQLA) | Market value minus LAF/MSF haircut | Same as draft | Ensures realistic liquidity valuation. |
| Callable pledged deposits | Considered callable | No change stated | Reflects liquidity availability. |
| Wholesale deposits from trusts/LLPs | Not covered | Run-off reduced from 100% to 40% | Rationalised for actual behavior. |
| Effective Date | 1 April 2025 | Extended to 1 April 2026 | More transition time for banks. |
| Expected LCR Impact | Not mentioned | Improves LCR by ~6 percentage points | Helpful, non-disruptive, aligned globally. |
Why Are We Doing This?
| Reason | Explanation |
|---|---|
| Digital Risk | IMB allows faster withdrawals. Run-off reflects risk. |
| Realism in Asset Valuation | Haircuts ensure HQLA isn’t overstated. |
| Proportional Treatment of Entities | Lowering run-off for LLPs improves fairness. |
| Global Harmonization | Basel-aligned, India-context aware. |
| Encouraging Prudent Liquidity Practices | Banks prepare better for stress events. |