RBI’s Basel III Revisions: Strengthening Liquidity To Fuel Credit Growth In Indian Banks

The Reserve Bank of India (RBI) has issued its final guidelines for the Basal III liquidity coverage ratio (LCR) framework for being effective from April 1, 2026. The purpose of these guidelines is to increase the liquidity of India’s banking system by reducing the disintegration of the industry, aligning it with global standards. The final provisions address the stakeholder response, especially about retail deposits and wholesale funding, leading to notable adjustment from earlier draft proposals.

Key Changes and Their Impact:

Retail deposits with IMB features: A major change in the final guidelines worries about the retail deposits capable of internet and mobile banking (IMB). While the draft proposed an additional 5% run-off factor for these deposits, the final version reduces it by 2.5%, which provides relief to banks. In addition, the run-offs have been revised for stable and low stable IMB-competent retail deposits:

• Stable IMB- enabled deposits will attract 7.5% run-off rate (up from 5% in draft).
• Less stable IMB- enabled deposits will now have 12.5% ​​run-off rate (up from 10%).

These changes address concerns that can stress high run-off factor liquidity buffers, providing more manageable approaches to banks. The amendment is expected to increase the total LCR of banks by about 6 percent, which increases liquidity and stability in the banking system.

Wholesale Funding from Non-Financial Entities: The guidelines also introduce a change in the treatment of wholesale funding from ‘other legal entities’ (OLEs) such as trusts, partnerships, and LLPs. The run-off rate for funding from these non-financial entities has been reduced to 40% from the previously prescribed 100%. This reduction provides banks with more flexibility in managing their liquidity, as it deems these funds less volatile than previously considered.

Callable Deposit Treatment: Another significant change concerns non-callable fixed deposits that are pledged as collateral to secure loans or credit facilities. These deposits will now be treated as callable for LCR purposes, improving liquidity positions by making them more accessible for short-term needs.

Projected Benefits:

RBI’s impact analysis by Mr. Anil Gupta, Senior Vice President & Co Group Head- Financial Sector Ratings, ICRA, suggests that these amendments will increase the banking system’s aggregate LCR by 6 percentage points by December 31, 2024. With High-Quality Liquid Assets (HQLA) estimated at ₹45-50 lakh crore in the system, this improvement is expected to free up approximately ₹2.7-3.0 lakh crore in lendable resources. This liquidity-boost is projected to support a 1.4-1.5% increase in credit growth, providing a substantial lift to the banking sector’s ability to finance economic activities.

Conclusion:

The easing of provisions—especially concerning IMB-enabled retail deposits and wholesale funding from non-financial entities—will provide significant relief to banks, enabling them to manage liquidity more effectively.

The anticipated 6% increase in LCR and the resultant ₹2.7-3.0 lakh crore in lendable resources are expected to drive credit growth and bolster financial stability. These guidelines strike a balance between enhancing liquidity buffers and supporting credit expansion, ensuring the banking sector can continue to foster economic growth without compromising on regulatory requirements.

As the April 1, 2026 deadline approaches, banks will need to prepare for these changes, ensuring compliance and maximizing the additional liquidity headroom to support credit growth and financial stability.