Basel III Liquidity Standards: RBI Updates LCR Framework

The Basel III framework is intended to reinforce the regulation, supervision, and risk management of banks worldwide. One of the core elements of the framework is the Liquidity Coverage Ratio (“LCR”) which requires banks to maintain High-Quality Liquid Assets (“HQLA”) at least equal to their net cash outflows in a 30-day stress situation. The Reserve Bank of India (“RBI”) has been actively putting these standards into practice to increase the resilience of the Indian banking system. This update gives a concise overview of the recent announcements made by the RBI on the LCR framework.

Update: Refining Liquidity Coverage Ratio Parameters

On April 21, 2025, RBI released a circular detailing amendments to certain aspects of the LCR framework after a review and consideration of the views of stakeholders on a July 2024 draft circular. These changes, which will become effective from April 01, 2026, address run-off rates of certain categories of deposits and the valuation of HQLA.

One of the key changes is a rise in the run-off factor for retail deposits facilitated with internet and mobile banking (“IMB”) facilities. Stable retail deposits with IMB will now carry a 7.5% run-off factor (compared to 5%), while less stable deposits with IMB will carry a 12.5% factor (compared to 10%). This captures the potentially quicker outflow of digitally accessible funds under stress.

In addition, wholesale funding that is not secured by non-financial small business customers (“SBCs”) will be considered similar to retail deposits for purposes of calculating LCR.

Regarding HQLA valuation, Level 1 assets in the form of government securities will be valued at their current market value, adjusted for haircuts aligned with the margin requirements under the RBI’s Liquidity Adjustment Facility (“LAF”) and Marginal Standing Facility (“MSF”). This aims for a more dynamic and market-sensitive valuation of these highly liquid assets.  

The RBI has also clarified the treatment of certain deposits.

Contractually pledged deposits used as collateral, although originally non-callable, will be treated as callable for LCR purposes. Further, the categorization and run-off rate on deposits from “other legal entities (“OLEs”)” has been changed. The category of OLE will now explicitly include funding from banks, insurance companies, and those in the ‘business of financial services’, with a 100% run-off rate. On the contrary, financing by non-financial organizations such as trusts, associations, partnerships, and other incorporated organizations (except treated as SBCs) will be classified as “non-financial corporates” and will be charged a reduced run-off rate of 40%, a considerable reduction from the earlier prescribed 100%.

Conclusion

These specific amendments to the Basel III LCR regime by the RBI are meant to further enhance the liquidity robustness of Indian banks. Through a calibration of run-off rates for digitally facilitated retail deposits and selected wholesale funding, and through better capturing the valuation of HQLA, the RBI is guaranteeing an improved and internationally aligned liquidity management system. The reduction in run-off rates for non-financial corporate deposits to a lower level recognizes their varied liquidity profile and is slated to be taken up in a non-disruptive fashion. These measures underscore the RBI’s commitment to maintaining a stable and sound banking sector in India.