RBI Governor Shaktikanta Das: Liquidity coverage ratio of banks being brought down to 80%

Reserve Bank of India governor Shaktikanta Das announced that the liquidity coverage ratio (LCR) of scheduled commercial banks will be brought down to 80 percent from the existing 100 percent with immediate effect.

"LCR requirement for scheduled commercial banks is being brought down from 100 percent to 80 percent with immediate effect," said the RBI governor.

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This was among a slew of measures taken by the banking regulator to deal with the Coronavirus (COVID-19) outbreak and its impact on financial institutions.

Das said that the LCR requirement will be gradually restored back in two phases; 90 percent by October 1, 2020 and 100 percent by April 1, 2021.

Banks have been facing stress due to the shutdown in India following COVID-19 pandemic and a cut in LCR requirement will manage their liquidity effectively.

The LCR provides short-term resilience of banks to potential liquidity disruptions by ensuring that they have sufficient high-quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days.

LCR was part of the 'Basel III: International framework for liquidity risk measurement, standards and monitoring' which is an international banking regulation issued in December 2010.

RBI had made the LCR requirement binding on banks from January 1, 2015. Here, a transition time had been provided to banks where these entities reached 100 percent LCR by January 1, 2019.

The banking regulator had said earlier that during a period of financial stress, banks can use their stock of HQLA, leading to LCR thereby falling below 100 percent.

What is LCR?

LCR is the proportion of high liquid assets set aside to meet short-term obligations.

This ratio is calculated by dividing a bank's high-quality liquid assets by its total net cash flows, over a 30-day stress period. Here, high-quality liquid assets include only those with a high potential to be converted easily and quickly into cash.

According to RBI, liquid assets comprise of high-quality assets that can be readily sold or used as collateral to obtain funds in a range of stress scenarios. These assets should be without legal, regulatory or operational impediments.

Under LCR, the liquidity of an asset depends on the underlying stress scenario, the volume to be monetised and the time-frame considered.

Nevertheless, there are certain assets that are more likely to generate funds without incurring large discounts due to fire-sales even in times of stress.

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