Why in News?

The Reserve Bank of India (RBI) has relaxed the Liquidity Coverage Ratio (LCR) norms by introducing a new requirement: banks must now assign an additional 2.5% run-off factor to retail deposits accessible via internet and mobile banking (IMB) services.

A run-off factor refers to the percentage of deposits that a bank expects to be withdrawn in a short-term period of stress.

What’s in Today’s Article?

• Liquidity Coverage Ratio (LCR)
• RBI Releases Final LCR Norms

Liquidity Coverage Ratio (LCR)

• The LCR is a regulatory standard designed to ensure that banks hold enough high-quality liquid assets (HQLAs) to cover their total net cash outflows over a 30-day stress period.
• It acts as a financial stress test to protect against short-term liquidity disruptions.
• Origin and Implementation
  • The LCR was developed by the Basel Committee on Banking Supervision (BCBS) following the global financial crisis.
  • Proposed in 2010 and finalized in 2014, the rule became fully applicable with a 100% minimum requirement in 2019.
  • It primarily applies to large banks with over $250 billion in assets or $10 billion in foreign exposure.
• LCR Formula
  • LCR = High-Quality Liquid Assets (HQLA) / Total Net Cash Outflows (30 days)
  • The ratio reflects a bank’s ability to survive a liquidity crunch for 30 days without external support.
• High-Quality Liquid Assets (HQLA)
  • In India, HQLA are assets that banks and other financial institutions hold to meet short-term liquidity needs, especially during periods of stress. E.g. - Cash and Balances with the RBI; Government Securities etc.
  • These assets are readily convertible to cash with minimal loss in value and are considered to be low-risk and of high credit quality.
  • They serve as a safety net, ensuring institutions can meet their funding obligations promptly.
• Limitations of LCR
  • Reduced Lending Capacity: Holding excess liquidity may limit banks’ ability to offer loans.
  • Uncertain Effectiveness: The real test of LCR’s adequacy will come only during a future financial crisis.

RBI Releases Final LCR Norms

• RBI has finalized and released the LCR guidelines. A key update includes an additional 2.5% run-off factor for internet and mobile banking (IMB)-enabled deposits of retail and small business customers.
• This is a reduction from the earlier proposed 5%.
• Digital Deposits and Run-off Factors
  • IMB-enabled stable retail deposits will now attract a 7.5% run-off factor (up from 5%).
  • IMB-enabled less stable deposits will have a 12.5% run-off factor (up from 10%).
  • IMB includes services like internet banking, mobile banking, and UPI.
• Implementation Timeline
  • The revised norms will be effective from April 1, 2026 and apply to all commercial banks, excluding payments banks, regional rural banks, and local area banks.
  • During meetings with RBI in January 2025, both public and private banks requested a deferment of LCR implementation, citing preparedness concerns.
  • Originally proposed in July 2024, the RBI had called for a 5% additional run-off for IMB-enabled deposits, which sparked industry feedback.
• Impact on Liquidity and Lending
  • The RBI estimates that the banking system’s LCR will improve by 6% as of December 31, 2024.
  • With Rs 45–50 lakh crore in HQLAs, the relaxation could free up Rs 2.7–3 lakh crore in lendable resources.
  • This may support an additional credit growth of 1.4–1.5%, boosting economic activity.