RBI released New Circular on Liquidity Guidelines Under Basel III: The Reserve Bank of India (RBI) has released a new circular announcing important changes to its Basel III liquidity framework, specifically targeting the Liquidity Coverage Ratio (LCR). These changes are aimed at strengthening the liquidity position of banks while aligning India’s regulatory framework with international standards. The updated guidelines will come into effect from April 1, 2026, and apply to all commercial banks, except Payments Banks, Regional Rural Banks (RRBs), and Local Area Banks (LABs).
What is the Liquidity Coverage Ratio (LCR)?
LCR is a rule under Basel III guidelines that ensures banks have enough High-Quality Liquid Assets (HQLA) to survive a 30-day period of financial stress. These assets must be easily sellable and of high credit quality.
Key Changes Made by RBI
1. Higher Run-Off Rate for Deposits with Digital Banking Access
- If a customer’s retail deposit has internet or mobile banking access, the bank must assume there’s a higher chance the customer might withdraw it quickly in a crisis.
- Therefore, these accounts will now have higher run-off rates (i.e., the amount the bank assumes might leave):
- Stable deposits with digital access → 7.5% run-off rate (up from 5%)
- Less stable deposits with digital access → 12.5% run-off rate (up from 10%)
Why this is needed? Customers with digital access can withdraw money quickly during uncertain times, so banks need to be better prepared.
2. Small Business Customers Treated Like Retail Customers
- Unsecured deposits from non-financial small business customers will be treated just like retail deposits, meaning they will follow the same run-off rates as above.
This is needed as many small businesses behave like individual retail customers in terms of deposit patterns.
3. New Valuation Rule for Government Securities
- Government securities held as Level 1 HQLA (the most liquid assets) must now be valued based on market value, and haircuts (i.e., discounts) must follow the RBI’s LAF and MSF guidelines.
This change ensures the value of these securities is realistic and matches market conditions.
4. Treatment of Pledged Fixed Deposits
- Previously, some non-callable fixed deposits (which cannot be withdrawn before maturity) were excluded from LCR calculations.
- Now, if such a deposit is used as collateral for a loan or credit facility, it will be treated as callable, meaning it must be included in LCR calculations with the appropriate risk factors.
Why this change? If the deposit is pledged, there’s a possibility it could be used, so it must be factored into liquidity calculations.
5. Updated Rules for Deposits from Legal Entities
Earlier, deposits from entities like HUFs, trusts, partnerships, AoPs, etc., were treated as unsecured wholesale funding from “Other Legal Entities (OLEs)”, and had a 100% run-off rate, unless they qualified as Small Business Customers (SBCs).
New Rules:
- Only funding from banks, insurance companies, financial institutions, and entities engaged in financial services will now be treated as OLEs (still at 100% run-off).
- Funding from non-financial entities (like educational or religious trusts, partnerships, LLPs, AoPs, etc.) will now be considered as coming from non-financial corporates, with a reduced run-off rate of 40%.
Impact of the Changes
These updates are designed to:
- Strengthen the liquidity preparedness of banks,
- Bring Indian banking regulations closer to global Basel III standards, and
- Ensure non-disruptive implementation by giving banks time to adapt.
New Rules Released by RBI
| Change | Old Rule | New Rule |
|---|---|---|
| Digital-access retail deposits | 5% (stable), 10% (less stable) | 7.5% (stable), 12.5% (less stable) |
| Small business customer deposits | Treated separately | Treated like retail |
| Valuation of Govt. securities | As per previous circular | Must follow market value + LAF/MSF haircuts |
| Pledged fixed deposits | Excluded from LCR | Included in LCR |
| Deposits from HUFs/trusts/etc. | 100% run-off as OLEs | 40% run-off as non-financial corporates |
The RBI’s updated guidelines under the Basel III LCR framework are a step forward in modernizing India’s banking system. By recognizing new banking behaviors like digital withdrawals and better categorizing funding sources, the RBI is helping banks stay better prepared for liquidity shocks — all while keeping the transition smooth and well-aligned with international practices.
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