Indian Banks Get Until April 2026 to Implement New LCR Framework
The Reserve Bank of India (RBI) has released new guidelines for the Liquidity Coverage Ratio (LCR) that will come into effect from April 1, 2026. These changes are aimed at improving the liquidity resilience of Indian banks while aligning domestic rules with international Basel III standards.
Mumbai: The Reserve Bank of India (RBI) has released new guidelines for the Liquidity Coverage Ratio (LCR) that will come into effect from April 1, 2026. These changes are aimed at improving the liquidity resilience of Indian banks while aligning domestic rules with international Basel III standards.
Key Changes: Additional Run-Off Rates and Adjusted Haircuts
As per the updated rules, banks will be required to apply an additional 2.5% run-off rate to retail and small business deposits accessed through internet and mobile banking. This change reflects growing digital banking usage and associated liquidity risks.
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Moreover, banks will need to adjust the market value of Government Securities—classified as Level 1 High-Quality Liquid Assets (HQLA)—with haircuts in accordance with Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) margin requirements.
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Wholesale Funding Composition Rationalized
The RBI has also rationalized the wholesale funding structure. Under the revised norms, non-financial entities such as trusts, educational institutions, charitable and religious bodies, partnerships, and LLPs will face a lower run-off rate of 40%, compared to the current 100%. This move aims to ease pressure on banks’ liquidity requirements from stable, long-term sources.
Transition Period Until 2026 to Upgrade Systems
To ensure a smooth implementation, the RBI has granted banks ample time to transition their systems and practices. The new LCR norms will be effective from April 1, 2026. This phased approach aims to minimize disruption while enabling banks to build capacity and comply effectively.
Positive Impact Expected on Overall Bank Liquidity
Based on an impact analysis conducted using data as of December 31, 2024, the RBI estimates that the overall LCR for banks will improve by approximately 6 percentage points once the new guidelines are implemented. Importantly, all banks are projected to remain comfortably above the minimum LCR requirement, affirming the sector’s stability.
Final Guidelines Issued After Industry Feedback
The revised guidelines follow the RBI’s draft circular issued on July 25, 2024, which sought feedback from stakeholders on proposed changes to the LCR framework. The final version incorporates several suggestions and concerns raised by the banking community, ensuring a well-balanced and inclusive regulatory update.
What Is LCR and Why It Matters?
The Liquidity Coverage Ratio is a core element of the Basel III regulatory framework. It mandates banks to maintain a sufficient stock of HQLAs to cover net cash outflows over a 30-day stress period, thus safeguarding financial stability during market shocks.
