RBI issues draft circular on BASEL III norms for liquidity standards

The apex banker has released the draft circular on the BASEL III framework of liquidity standards. And as per the new norms, banks in India will be required to keep a high amount of quality liquidity assets (LCR) or liquidity coverage ratio. The decision has been taken in the interest of depositors nudging the bankers to better manage high withdrawal by depositors in stress situations. Also, the depositor's ability to withdraw cash increases due to increasing use of digital banking.

Liquidity coverage ratio as per Investopedia is a requirement under Basel III accords whereby banks must hold sufficient high-quality liquid assets to cover cash outflows ...

While releasing the draft, the RBI stated that banking has seen tremendous 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, it added.

The extant LCR framework for banks in India has been reviewed in light of recent developments. In order to further enhance the liquidity resilience of banks, the following decisions listed below have been taken:

Banks shall assign an additional 5 per cent run-off factor for retail deposits which are enabled with internet and mobile banking facilities (IMB)1 i.e., stable retail deposits enabled with IMB shall have 10 per cent run-off factor and less stable deposits enabled with IMB shall have 15 per cent run-off factor.

Unsecured wholesale funding provided by non-financial small business customers shall be treated in accordance with the treatment of retail deposits as at (a) above.

Level 1 HQLA in the form of Government securities shall be valued at an amount not greater than their current market value, adjusted for applicable haircuts in line with the margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) described in RBI circular FMOD.MAOG No.125/01.01.001/2017-18 dated June 06, 2018 as amended from time to time.

In case a deposit, hitherto excluded from LCR computation (for instance, a non-callable fixed deposit), is contractually pledged as collateral to a bank to secure a credit facility or loan, such deposit shall be treated as callable for LCR purposes and provisions of para 9 of circular DBR.BP.BC.No.86/21.04.098/2015-16 dated March 23, 2016 shall apply.

Also it added that this circular applies to all Commercial Banks (excluding Payments Banks, Regional Rural Banks and Local Area Banks) and the instructions  to this effect shall come into force with effect from April 01, 2025.