Summary: On April 21, 2025, the Reserve Bank of India (RBI) announced amendments to the Liquidity Coverage Ratio (LCR) framework aimed at enhancing liquidity resilience for banks. The key changes include assigning a 2.5% additional run-off rate to deposits from internet and mobile banking-enabled retail and small business customers, reflecting their lower stability. Additionally, the market value of government securities (Level 1 High-Quality Liquid Assets or HQLA) will now be adjusted with haircuts according to the margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF). Furthermore, funding from non-financial entities like trusts and partnerships will face a lower run-off rate of 40%, down from the current 100%. These changes are expected to improve the LCR of banks by approximately 6 percentage points. The amendments align with global standards and are intended to strengthen the liquidity position of banks without causing disruption. The LCR is a measure that ensures banks maintain sufficient liquid assets to survive 30 days of liquidity stress. Run-off rates are a key factor, indicating the proportion of deposits that may be withdrawn during such stress. The LAF and MSF tools help manage liquidity in the banking system, with the MSF providing emergency funding during liquidity crises. Banks will continue to meet the minimum regulatory LCR requirements, ensuring stable financial operations across India’s banking sector.
With reference to these amendments:
A bank shall:
- assign additional run-off rates of 2.5 % to internet and mobile banking enabled retail and small business customer deposits.
- adjust the market value of Government Securities (Level 1 HQLA) with haircuts in line with margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).
- Funding from non-financial entities like trusts (educational, charitable and religious), partnerships, LLPs, etc. shall attract a lower run-off rate of 40 % as against 100 % currently.
It is estimated that the net impact of these measures will improve the LCR of banks, at the aggregate level, by around 6 % points as on that date. Further, all the banks would continue to meet the minimum regulatory LCR requirements comfortably.
Reserve Bank is sanguine that these measures will enhance the liquidity resilience of banks in India, and further align the guidelines with the global standards in a non-disruptive manner.
What are run-off rates:
Run-off rate means the percentage of outstanding balance of each type of liabilities and off- balance sheet items that is expected to generate cash outflows over 30 days under severe liquidity stress scenarios.
What are run-off rates factor:
A run-off factor refers to the percentage of deposits that a bank expects to be withdrawn in a short-term period of stress. As per RBI, retail deposits are divided into two categories – stable and less stable deposits.
What is Liquidity Adjustment Facility:
The Liquidity Adjustment Facility (LAF) is a monetary policy tool used by the Reserve Bank of India (RBI) to manage liquidity in the banking system.
It allows banks to borrow money through repurchase agreements (repos) or lend money through reverse repos, thereby injecting or absorbing liquidity as needed.
The LAF was introduced following the recommendations of the Narasimham Committee on Banking Sector Reforms in 1998.
What is Marginal Standing Facility
The Marginal Standing Facility (MSF) is a monetary policy tool introduced by the Reserve Bank of India (RBI) in 2011.
It allows banks to borrow funds overnight from the RBI in case of an emergency when inter-bank liquidity dries up completely.
The MSF is designed to help manage short-term liquidity in the banking system and is part of the broader Liquidity Adjustment Facility (LAF) framework.
Under this facility, banks can borrow additional amounts beyond their statutory liquidity ratio (SLR) requirements, providing them with a safety net during liquidity shortages.
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