RBI issued New Guidelines regarding Liquidity Coverage Ratio (LCR)

Liquidity Coverage Ratio (LCR) is a regulatory standard that ensures financial institutions maintain sufficient high-quality liquid assets to cover net cash outflows during a 30-day stress period. It strengthens short-term resilience and promotes financial stability in the banking sector.

Context: The Reserve Bank of India has issued new guidelines regarding Liquidity Coverage Ratio (LCR).

What is Liquidity Coverage Ratio (LCR)?

Liquidity Coverage Ratio (LCR) refers to the minimum amount of High-Quality Liquid Assets (HQLA) a bank must hold to meet short-term obligations in a 30-day stress scenario.
High LCR decreases the money supply by requiring banks to hold a larger proportion of highly liquid assets.
A run-off factor is used to estimate how much of the bank’s liabilities (like deposits) may “run off” (i.e., be withdrawn) under stress.

Key Changes in LCR Norms

Reduced Run-off Factor for Digital Deposits:
- Banks are now required to assign an additional 5% run-off factor for retail deposits accessible via Internet and Mobile Banking (IMB), including platforms like UPI. (Previously – 5%)
Adjusted Run-off Rates Based on Deposit Stability:
- Stable IMB-enabled retail deposits: Run-off factor increased from 5% to 5%.
Reclassification of Non-Financial Entity Funding:
- Funding from entities like trusts, partnerships, and LLPs will now attract a 40% run-off rate, down from the previous 100%.
Treatment of Small Business Customer Funding:
- Unsecured wholesale funding from non-financial small business customers will be treated similarly to retail deposits, attracting an additional 5% run-off factor.

UPSC PYQ

Q. What is the importance of the term “Interest Coverage Ratio” of a firm in India? (2020)

It helps in understanding the present risk of a firm that a bank is going to give a loan to.
It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.
The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service its debt.

Select the correct answer using the code given below:

(a) 1 and 2 only

(b) 2 only

(d) 1, 2 and 3

Answer: A