RBI on Monday July 21, 2025 through notification announced that “it has been decided to permit banks to reckon Government securities as Level 1 HQLA* under FALLCR** within the mandatory SLR requirement up to 16 percent of their NDTL, under Basel III Framework on Liquidity Standards.
Consequently, the total HQLA carve-out from the mandatory SLR, which can be reckoned for meeting LCR requirement, will be 18 percent of NDTL (2 percent MSF plus 16 percent FALLCR)”
Purpose
The Liquidity Coverage Ratio (LCR) under Basel III is designed to ensure that banks maintain an adequate level of unencumbered High-Quality Liquid Assets (HQLA) that can be readily converted into cash to meet liquidity needs over a 30-calendar day stress period. This requirement promotes the short-term resilience of a bank’s liquidity profile in times of financial stress.
High-Quality Liquid Assets (HQLA) – Definition and Composition
HQLA are assets that can be easily and immediately converted into cash with little or no loss of value. These typically include:
- Level 1 assets: e.g., cash, central bank reserves, and marketable securities backed by sovereigns or central banks with a 0% risk weight under Basel II.
- Level 2 assets: subject to haircuts and caps; include certain government and corporate bonds with high credit ratings.
Net Cash Outflows – Estimation Methodology
Net cash outflows are calculated as the difference between the expected cash outflows and inflows over the 30-day stress period. Key components include:
- Potential deposit withdrawals.
- Drawdowns on committed facilities.
- Obligations under derivative contracts and other payment commitments.
Minimum LCR Requirement
Basel III mandates that banks maintain a minimum LCR of 100%, i.e., HQLA must at least equal the total estimated net cash outflows over the stress period. This threshold ensures that banks can survive immediate liquidity pressures without external support.
Supervisory Review and Evaluation
LCR compliance is a central element of the regulatory Supervisory Review Process (SRP). However, it is not a standalone measure—supervisors assess it alongside other qualitative and quantitative liquidity risk management tools, including stress testing and internal governance practices.
Impact on Banks
The LCR requirement influences banks to:
- Hold higher proportions of liquid assets.
- Reassess the stability and cost of funding sources.
- Adjust their business models to ensure compliance while optimizing profitability.
Regulatory Disclosures
Banks are required to publicly disclose their LCR data, enhancing market discipline and transparency in liquidity risk management. These disclosures typically include:
- The value of HQLA held.
- Net cash outflows.
- LCR percentage.
Specific Considerations within the LCR Framework
Run-off Factors
Different categories of liabilities have varying assumed outflow rates (run-off factors), based on historical behavior:
- Retail deposits with electronic access (e.g., internet and mobile banking) may have higher run-off factors due to perceived ease of withdrawal.
- Stable deposits covered by deposit insurance attract lower outflow rates.
Unsecured Wholesale Funding
Unsecured funding from non-financial corporates, including small businesses, may be treated comparably to retail deposits, reflecting their historical behavior and relative stability.
HQLA Valuation and Haircuts
HQLA are valued at market prices but subject to regulatory haircuts to account for potential market volatility and liquidity risk. For example:
- Government securities may be subject to haircuts of 0% to 15%, depending on the asset class.
Treatment of Pledged Deposits
Deposits that are contractually pledged as collateral (e.g., for loans) are treated as callable—i.e., they are included in outflows—since they may be withdrawn by the depositor under stress.
Regulatory Flexibility During COVID-19
During the COVID-19 pandemic, several jurisdictions, including India, temporarily allowed relaxation in LCR maintenance, enabling banks to draw down on their liquidity buffers to support the economy.
Basel III Liquidity Standards – RBI Implementation
The Reserve Bank of India (RBI) adopted Basel III liquidity standards in a phased manner:
- The LCR requirement was gradually implemented from 2015, reaching 100% from January 1, 2019.
- RBI also issues periodic guidelines on the classification of HQLA, valuation norms, and additional disclosures for Indian banks.
- Disclosures are mandated under RBI’s Master Circular on Basel III Framework on Liquidity Standards.
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