The Reserve Bank of India (RBI) has decided to defer the implementation of the revised Liquidity Coverage Ratio (LCR) norms by March-end FY26. This decision will help in ensuring banks have sufficient time to comply without facing liquidity disruptions. Earlier, banks had expressed concerns over the deadline of March 31, 2025, arguing that it did not offer sufficient time to adjust to the new liquidity requirements.
About Liquidity Coverage Ratio (LCR)
- It refers to the proportion of highly liquid assets that financial institutions must hold to ensure that they can meet their short-term obligations and ride out any disruptions in the market.
- It is a key Basel III reform.
- Basel Norms are international banking regulations developed by the Basel Committee on Banking Supervision (BCBS) focused on capital adequacy, risk management, and financial stability.
- Objective: Ensures banks maintain a sufficient stock of High-Quality Liquid Assets (HQLAs) to meet liquidity needs under a 30-day stress scenario.
- Purpose: To enhance the short-term resilience of banks’ liquidity risk profiles.
- LCR decrease money supply by requiring banks to hold a larger proportion of highly liquid assets.
- NOTE: High-quality liquid assets include only those that can be converted easily and quickly into cash.
- Why 30 days scenario? 30 days was chosen in the belief that in the event of a serious a financial crisis, governments and central banks, would most likely step in to rescue and stabilize the financial system within that time frame. Having a 30-day cushion of cash would theoretically enable the banks to survive a bank run until that happened.