Draft Guidelines Issued on Enhancements to Basel III Liquidity Standards

The Reserve Bank of India (RBI) has proposed amendments to the Basel III Liquidity Coverage Ratio (LCR) framework, aiming to bolster the short-term liquidity resilience of banks in India. These changes, detailed in a draft circular released on July 25, 2024, come in response to recent developments and the increasing risks posed by digital banking channels.

Under the current LCR framework, banks are required to maintain a stock of high-quality liquid assets (HQLA) sufficient to cover expected net cash outflows over the next 30 calendar days. This requirement ensures that banks can manage liquidity stress effectively. However, recent incidents in various jurisdictions have highlighted the need to reassess certain assumptions within the LCR framework, particularly regarding the rapid withdrawal or transfer of deposits through digital banking channels during periods of stress.

Key changes to the Liquidity Coverage Ratio (LCR) Framework:

• Impact of Technology on Retail Deposits: With the proliferation of internet and mobile banking (IMB) facilities, the dynamics of retail deposits have shifted significantly. To account for the increased liquidity risk associated with these technologies, banks will now be required to assign an additional 5% run-off factor to retail deposits enabled by IMB. This adjustment translates to a 10% run-off factor for stable retail deposits and a 15% run-off factor for less stable deposits equipped with IMB features.
• Treatment of Unsecured Wholesale Funding: Unsecured wholesale funding provided by non-financial small business customers will now be treated similarly to retail deposits. This change aims to align the risk management approach for these funds with the updated retail deposit guidelines.
• Valuation of High-Quality Liquid Assets (HQLA): Government securities classified as Level 1 HQLA will be valued based on their current market value, adjusted for applicable haircuts. These adjustments will be in accordance with the margin requirements set out under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF), as per the RBI circular from June 6, 2018. This measure ensures that the valuation of HQLAs remains robust and reflective of market conditions.
• Treatment of Pledged Deposits: Deposits that were previously excluded from LCR computation, such as non-callable fixed deposits, will now be treated as callable if they are contractually pledged as collateral to secure a loan or credit facility. This adjustment ensures that all relevant deposits are accurately factored into LCR calculations, enhancing the overall liquidity management framework.

The revised guidelines will come into effect on April 1, 2025. These guidelines will apply to all commercial banks, with the exception of Payment Banks, Regional Rural Banks, and Local Area Banks.

The RBI’s guidelines on the LCR framework underscore the importance of maintaining liquidity resilience in the banking sector. By addressing the risks associated with technological advancements and refining the treatment of various deposit categories, these changes aim to strengthen the overall stability and robustness of banks in India.s