The Reserve Bank of India (RBI) has decided to defer the implementation of the revised Liquidity Coverage Ratio (LCR) norms.

About LCR

• The Liquidity Coverage Ratio (LCR) is a financial ratio that measures the proportion of High-Quality Liquid Assets (HQLA) held by financial institutions.
• HQLA refers to highly liquid financial instruments that can be quickly converted into cash with minimal or no loss of value.
• HQLA assets can also be used as collateral for borrowing purposes.

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• HQLA Include:
  • Cash
  • Short-term bonds
  • Other cash equivalents
  • Excess Statutory Liquidity Ratio (SLR)
  • Marginal Standing Facility (MSF) assets
  • Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) is set at 15% of the bank’s deposits from April 1, 2020.
• Objective of LCR: To enhance the resilience of the banking sector.
  • It ensures that banks maintain sufficient liquid assets to survive a 30-day period of severe liquidity stress.
• Limitation of LCR: Higher LCR requirements may lead to banks holding more cash, reducing their ability to issue new loans.
  • This could slow economic growth by limiting the availability of credit.
• Formula: LCR = High-Quality Liquid Asset Amount (HQLA) / Total Net Cash Flow Amount
• LCR Introduction: As Part of the Basel III reforms to improve liquidity risk management in the banking sector.

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• Basel III Requirements: The Basel Committee on Banking Supervision (BCBS) introduced the Liquidity Coverage Ratio (LCR) in 2010.
  • It was implemented after the 2008 financial crisis to strengthen banks’ liquidity risk management.
  • The initial LCR requirement was set at 60% in 2015.
  • It was gradually increased to 100% by 2019 to achieve full compliance.

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