RBI’s new LCR rules: Digital deposits tougher, trust funding cheaper, banks get more liquidity

On July 25, 2024, the Reserve Bank set the stage for a significant shift in banking liquidity norms with a draft circular proposing changes to the Basel III Liquidity Coverage Ratio (LCR) framework. After soliciting feedback from stakeholders, the central bank has now issued the final guidelines, aiming to fortify liquidity standards while aligning with global benchmarks.

The Reserve Bank confirmed that the feedback from banks and stakeholders was carefully examined before finalising the new liquidity guidelines. With immediate effect, banks must assign an additional run-off rate of 2.5 percent to deposits from retail and small business customers who use internet and mobile banking.

Banks are also required to adjust the market value of Government Securities (Level 1 HQLA) using haircuts that match the margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).

In a further move, the Reserve Bank has rationalised the composition of wholesale funding from ‘other legal entities’. Funding from non-financial entities — such as trusts (educational, charitable, and religious), partnerships, and LLPs — will now attract a lower run-off rate of 40 per cent, down from the current 100 per cent.

The central bank conducted an impact analysis using data submitted by banks as of December 31, 2024. The results indicate that these changes will improve banks’ aggregate LCR by about 6 percentage points, while all banks will comfortably meet the minimum regulatory LCR requirements. The Reserve Bank stated that these measures “will enhance the liquidity resilience of banks in India and further align the guidelines with the global standards in a non-disruptive manner.”

To ensure a smooth transition, the revised instructions will come into effect from April 1, 2026, giving banks sufficient time to update their systems for the new standards.