Mint Explainer: What RBI’s new liquidity coverage ratio norms mean for banks

What do the new norms mean for banks?

RBI has asked banks to assign an additional run-off rate of 2.5% to internet and mobile banking (IMB)-enabled retail and small business customer (SBC) deposits to compute their LCR. This means that ‘stable’ retail deposits enabled with IMB will attract a run-off factor of 7.5%, whereas ‘less stable deposits’ enabled with IMB will have a run-off factor of 12.5% as against the current 5% and 10%, respectively.

Further, unsecured wholesale funding provided by non-financial small business customers (SBCs) will be treated as ‘retail deposits’ and attract the same run-off factor as above.

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RBI has also excluded entities such as trusts and partnerships from the ‘other legal entities’ category for computing wholesale funding. Accordingly, the ‘other legal entities’ category will now constitute all deposits and other funding from banks, insurance companies, financial institutions, and other entities in the “business of financial services."

As such, funding from non-financial entities such as educational, religious, and charitable trusts, Association of Persons (AoPs), partnerships, proprietorships, Limited Liability Partnerships, and other incorporated entities will be categorised as ‘non-financial corporates’, and funding or deposits from them will attract a run-off rate of 40% as against 100% at present unless these entities are being treated as SBCs under the LCR framework.

How will banks’ liquidity be impacted?

As per an impact analysis undertaken by RBI, banks' LCR will improve by around 6 percentage points at an aggregate level. All banks will "comfortably" meet the minimum regulatory LCR requirements, the regulator said in a release.

What does RBI mean by ‘stable’ deposits?

As per RBI’s LCR framework issued in 2014, ‘stable deposits’ are defined as insured deposits (to the extent covered by the Deposit Insurance and Credit Guarantee Corporation) in transactional accounts where salaries/pensions are automatically deposited or paid out. These also include relationship-based accounts, such as those wherein the deposit customer has another relationship with the bank for a loan. All other deposits are considered ‘less stable’ retail deposits.

Analysts expect the easier final norms to unlock ₹2.5-3 trillion of deployable liquidity as compared with the draft norms, translating into a potential 1-2% boost to credit growth and 2-4 basis points in terms of net interest margins.

Small business customers are those whose total average annual turnover is less than ₹50 crore, and their aggregated funding—including deposits, debt securities or derivatives—to a bank is also less than ₹50 crore.

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Assets are considered HQLA if they can be easily and immediately converted into cash at little or no loss of value. 

Why were the new norms introduced?

RBI said that the objective of the revised framework is to enhance the liquidity resilience of Indian banks and further align with the global standards in guidelines in a non-disruptive manner.

In the draft framework issued on 25 July 2024, the regulator proposed reviewing the haircuts on HQLA and the run-off rates on certain categories of deposits to mitigate risks arising from banks' increased use of technology to facilitate instantaneous money transfers and withdrawals.

RBI’s decision to review the norms was prompted by the collapse of the US-based Silicon Valley Bank in March 2023. The tech-focused bank faced severe liquidity issues after a large number of depositors withdrew their funds, leading to panic among other deposit holders and eventually the bank shutting down.

The third-largest bank failure in US history also started a chain of events which led to multiple other banks, such as Signature Bank, shutting shop and several other small regional lenders seeing their market value crash—leading to systemic turbulence and overall deterioration in trust in the US banking system. First Citizens later purchased SVB's assets and deposits for up to $500 million in stock—a fraction of what the bank was worth before it failed.

How are the final norms different from the draft circular?

In the draft circular issued in July 2024, RBI had proposed that banks set aside an additional 5% as run-off factor for retail deposits enabled with IMB facilities. Accordingly, stable deposits were set to attract a run-off factor of 10% and less stable deposits 15%.

RBI had then also proposed that funding in the form of government securities, categorised as ‘Level 1 HQLA’, will need to be valued at an amount not greater than their current market value, adjusted for applicable haircuts in line with the margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF). This proposal has been retained in the final norms.

Initially proposed to come into effect in April 2025, the RBI has now given banks one year to comply with the new norms. Accordingly, banks will need to transition to the new standard for computing LCR effective 1 April 2026.

Why are the final norms softer than the draft norms?

Following the issue of draft guidelines, banks, through the industry body Indian Banks’ Association, had approached the RBI and finance ministry seeking relaxation in the proposed norms, fearing that the higher liquidity requirements might hinder their ability to lend.

Analysts then estimated that the LCR guidelines would push banks to focus on branch banking, mobilise more non-callable deposits, and increase the share of High-Quality Liquidity Assets by keeping more liquidity on the balance sheet.

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Notably, when the norms were issued in July 2024, banks were already facing tight systemic liquidity, and seeing signs of slowdown in deposit growth, with rise in deposits lagging credit growth for the system. The norms, which were initially expected to come into effect from April 2025, were seen exerting increased pressure on banks’ balance sheets, prompting banks to also seek more time to comply with the norms.

In his first address at a monetary policy conference in February 2025, RBI governor Sanjay Malhotra assured banks that they would have sufficient time—at least a year—to comply with the new LCR norms after the final guidelines were issued.