RBI issues guidelines on higher liquidity coverage ratio for retail deposits

 The Reserve Bank of India (RBI) has issued a draft circular on the Basel III framework regarding liquidity standards.

The central bank stated that banks under the Liquidity Coverage Ratio (LCR) framework must maintain a stock of high-quality liquid assets (HQLA) to cover expected net cash outflows over the next 30 days.

In Line with the LCR framework, the Central Bank has decided that banks should assign an additional five percent run-off factor for retail deposits enabled with internet and mobile banking facilities (IMB). Thus, stable retail deposits with IMB will have a 10 percent run-off factor, and less stable deposits with IMB will have a 15 percent run-off factor.

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The central bank has invited comments from banks and stakeholders on the draft by August 31, 2024.

According to RBI, “Banking has undergone rapid transformation in recent years. While increased usage of technology has facilitated the ability to make instantaneous bank transfers and withdrawals, it has also led to a concomitant increase in risks, requiring proactive management,” 

The draft circular also stated that unsecured wholesale funding from non-financial small business customers should be treated like retail deposits. Level 1 HQLA in the form of Government securities should be valued at no more than their current market value, adjusted for applicable haircuts in line with Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) requirements.

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The draft circular applies to all commercial banks, excluding payment banks, regional rural banks, and local area banks, and is proposed to take effect from April 1, 2025.

Moreover, deposits previously excluded from LCR computation, such as non-callable fixed deposits, will be treated as callable if pledged as collateral for a credit facility or loan.

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