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RBI has prescribed that Banks maintain LCR of at least 100 per cent.
To encourage banks to lend more, the Reserve Bank of India (RBI) has cut the run-off rates assigned to retail deposits and deposits from ‘non-financial corporates’ for computation of liquidity coverage ratio (LCR).
Liquidity Coverage Ratio (LCR) requires banks to maintain High Quality Liquid Assets (HQLAs) to meet 30 days net outgo under stressed conditions. RBI has prescribed that banks maintain LCR of at least 100 per cent.
Run-off factor means the possibility of deposits getting withdrawn/ transferred, including in stressed situations.
Under the final guidelines on ‘Basel III Framework on Liquidity Standards, which will come into effect from April 1, 2026, RBI said a bank has to assign an additional 2.5 per cent run-off factor (against 5 per cent prescribed in the draft circular issued in July 2024) for retail deposits which are enabled with internet and mobile banking facilities (IMB).
Stable retail deposits enabled with internet banking (IMB) will have 7.5 per cent run-off factor (10 per cent per the draft and 5 per cent applicable currently) and less stable deposits enabled with IMB will have 12.5 per cent run-off factor (15 per cent per the draft and 10 per cent applicable currently).
Further, “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 prescribed4), unless the above entities are treated as small business customers (SBC) under LCR framework.
Liquidity resilience
RBI said these amendments would help improve the liquidity resilience of banks and would further align the guidelines with global standards while ensuring that such an enhancement is done in a non-disruptive manner.
Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA, assessed that the reduction in the LCR will not be to the tune of 14-17 per cent anticipated earlier when the draft guidelines were issued. With easing of pressure on maintaining relatively higher HQLA, banks will have more resources to lend.
Banking expert V Viswanathan observed that to compensate for the impact of run-off factors for stable and unstable deposits and reduction in HQLA if a bank has borrowed under the marginal standing facility or the liquidity adjustment facility, RBI has now allowed deposits and other funding from non-financial entities to attract a run rate of 40 per cent as against 100 per cent earlier, provided it is not treated as retail deposit or SBC.
“This means the outflows from the above will be ₹40 only for a deposit of ₹100 accepted. All Certificate of Deposits, FDs and current account balances above ₹5 crore, could in the above category, attracting conversion factor of 40 per cent only. This will improve LCR,” he said.
Published on April 21, 2025
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