RBI releases draft circular on Basel III framework on liquidity standards

Reserve Bank of India

The Reserve Bank of India (RBI) on July 25 released a draft circular on the Basel III Framework on Liquidity Standards, which was announced to be issued in the April monetary policy.

The central bank said banks covered under Liquidity Coverage Ratio (LCR) framework are required to maintain a stock of high quality liquid assets (HQLA) to cover the expected net cash outflows in the next 30 calendar days. However, the recent episodes in some jurisdictions have demonstrated the increased ability of the depositors to quickly withdraw or transfer deposits during times of stress, using digital banking channels.

Such emerging risks may require a revisit of certain assumptions under LCR framework. Therefore, certain modifications to the LCR framework are being proposed towards facilitating better management of liquidity risk by the banks, central bank said.

The central bank reviewed LCR framework for banks in India and decided that banks shall assign an additional five percent run-off factor for retail deposits which are enabled with internet and mobile banking facilities (IMB) i.e., stable retail deposits enabled with IMB shall have 10 percent run-off factor and less stable deposits enabled with IMB shall have 15 percent run-off factor.

Unsecured wholesale funding provided by non-financial small business customers should be treated in accordance with the treatment of retail deposits, the draft circular said.

Level 1 HQLA in the form of Government securities should be valued at an amount not greater than their current market value, adjusted for applicable haircuts in line with the margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF), according to the circular.

The RBI said in case a deposit, hitherto excluded from LCR computation (for instance, a non-callable fixed deposit), is contractually pledged as collateral to a bank to secure a credit facility or loan, such deposit shall be treated as callable for LCR purposes.

Comments on the draft circular are invited from banks and other stakeholders by August 31, 2024, RBI said in a press release.

The release also said that the draft circular is applicable to all Commercial Banks (excluding Payments Banks, Regional Rural Banks and Local Area Banks), and may come into force with effect from April 01, 2025.