The Reserve Bank of India (RBI) has issued final guidelines under the Basel III Liquidity Coverage Ratio (LCR) framework, which includes relaxation of some provisions from its earlier draft proposal presented in last July.
An important adjustment in the provision pertains to the classification of retail deposits that are enabled by internet and mobile banking (IMB) facilities.
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The initial draft had suggested an extra run-off factor of 5%, but the finalised norms have reduced this figure to 2.5%, after considering the industry feedback.
According to the updated guidelines, stable IMB-enabled retail deposits, characterised by infrequent withdrawals, will now have a run-off rate of 7.5%, an increase from the earlier rate of 5%.
In contrast, less stable deposits, which are more likely to be withdrawn, will experience a run-off rate of 12.5%, up from the previous 10%. This adjustment reflects a decrease from the draft’s initially suggested rates of 10% for stable deposits and 15% for less stable deposits.
The regulatory authority anticipates that the revised norms will increase the LCR of banks by approximately 6 percentage points on an aggregate basis.
The RBI stated: “The Reserve Bank has undertaken an impact analysis of the above measures based on data submitted by banks, as on December 31, 2024.
“It is estimated that the net impact of these measures will improve the LCR of banks, at the aggregate level, by around 6 percentage points as on that date.”
Additionally, it stated that all banks will continue to easily satisfy the minimum regulatory LCR requirements.
The updated regulations are set to take effect on 1 April 2026, and will apply to all commercial banks, with the exception of payments banks, regional rural banks (RRBs), and local area banks.
The revised guidelines also clarify the structure of wholesale funding sourced from ‘other legal entities.’
As a result, funding obtained from non-financial entities such as trusts (including educational, charitable, and religious trusts), partnerships, and limited liability partnerships (LLPs) will now be subject to a reduced run-off rate of 40%, compared to the current rate of 100%.
Furthermore, the updated regulations stipulate that if a deposit, previously not included in the LCR calculation (such as a non-callable fixed deposit), is contractually pledged as collateral for a credit facility or loan, it will now be classified as callable for LCR calculations.
In the circular, the regulatory authority stated: “These amendments would help improve the liquidity resilience of banks in India and would further align the guidelines with global standards while ensuring that such an enhancement is done in a non-disruptive manner.”
