RBI Proposes Changes to Basel III Liquidity Framework

The Reserve Bank of India has issued a draft circular on the Basel III liquidity framework, inviting comments from stakeholders by August 31, 2024. The proposal includes revised run-off factors and changed assumptions under the Liquidity Coverage Ratio framework, effective from April 1, 2025.

The Reserve Bank of India (RBI) has issued a draft circular on the Basel III framework concerning liquidity standards, seeking comments from banks and stakeholders by August 31, 2024. This announcement follows the April monetary policy review.

Under the proposed changes, banks within the Liquidity Coverage Ratio (LCR) framework are required to maintain a stock of high-quality liquid assets (HQLA) to cover projected net cash outflows for the next 30 days. After an extensive review, the RBI has mandated that banks assign an additional five percent run-off factor for retail deposits enabled by internet and mobile banking (IMB) services. Stable retail deposits with IMB will have a 10 percent run-off factor, while less stable deposits will carry a 15 percent run-off factor. The RBI emphasized the rapid transformation in banking due to increased technology usage, which has enhanced instantaneous transactions but also heightened risks necessitating proactive management.

The draft circular also suggests treating unsecured wholesale funding from non-financial small business customers similarly to retail deposits. Furthermore, Level 1 HQLAs in the form of Government securities will be valued at no more than their current market value, adjusted for applicable haircuts per the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) requirements. Recent incidents highlight the enhanced ability of depositors to swiftly withdraw or transfer funds during stress periods via digital channels.

To address these emerging risks, the RBI has proposed modifications to better manage liquidity risk under the LCR framework. Notably, non-callable fixed deposits used as collateral will now be considered callable. These regulations apply to all commercial banks, except payment banks, regional rural banks, and local area banks, and will take effect from April 1, 2025.

(With inputs from agencies.)