In order to protect depositors from the risk of a bank becoming insolvent, the banking regulator has prescribed banks and other authorised financial institutions to fund themselves with a minimum amount of capital (CAR) in terms of Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards and Net Stable Funding ratio (NSFR)
With the objective to better align our guidelines with the BCBS standard and enable banks to manage liquidity risk more effectively, the Central Bank today decided to increase the existing threshold limit and other extensions of funds made by non-financial Small Business Customers from ₹ 5 crore to ₹ 7.5 crores for the purpose of maintenance of Liquidity Coverage Ratio (LCR). “ This circular is applicable to all Commercial Banks other than Regional Rural Banks, Local Area Banks and Payments Banks” from immediate effect, RBI said.
To determine the minimum amount of capital a bank those banks must have maintained minimum capital adequacy ratios. In India, the Reserve Bank of India (RBI) mandates the CAR for scheduled commercial banks to be 9%, and for public sector banks, the CAR to be maintained is 12%.
The Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) are significant components of the Basel III reforms. The LCR promotes the 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. The NSFR promotes resilience over a longer-term time horizon by requiring banks to fund their activities with more stable sources of funding on an ongoing basis..
