The RBI issued a final circular on Monday entitled “Basel Basel III Framework on liquuidity standards Liquuity coverage (CSF)-Relision of High-quality Liquid Assets (HQLA) and runoff rates in certain categories of deposits”.
The bankers will throw a sigh of relief since the runoff rates that will be applied to the deposit outputs have cut in the final version of the frame of the liquidity coverage ratio (CSF), FISH-A is the rigid recipes contained in the circulation of the Draft of July 2024.
The effect of reduction in runoff rates is that banks will have more loan resources to support growth. A higher runoff rate would have requested that they invest more in high quality liquid assets (HQLA), such as Treasury invoices, government values and state development loans.
What is the liquidity coverage ratio (CSF)?
CSF promotes the short -term resilience of banks to possible liquuidity interruptions by ensuring that they have an adequate level of high quality liquid assets (HQLA) not serious to survive a scenario of acute stress that lasts 30 days. RBI has prescribed to Anks that maintain a CSF or at least 100 percent, as of January 1, 2019, continuously.
Duration A financial stress period, banks can use their HQLA actions (such as treasure invoices, government values and state development loans) and CSF can submerge below 100 percent. Banks have to inform RBI immediately about the use of HQLA’s actions along with the reasons for such use and corrective steps initiated to rectify the situation.
What is the runoff rate?
The runoff rate means the proportion of deposits that can see outputs through stressful withdrawal/ transfer duration.
What settings did RBI make in the final circular in “Basel III Framework on liquuidity-reference standards of HQLA haircuts and runoff rates in certain categories of deposits”?
The runoff rates assigned to retail deposits and deposits of ‘non -financial companies’ have been reduced to calculate CSF.
Therefore, a bank has to assign an additional offer of 2.5 % (against 5 percent prescribed in the draft of the circular issued in July 2024) for retail deposits enabled with internet and mobile banking facilities (IMB).
Stable retail deposits enabled with Internet bench (IMB) will have a scouring factor of 7.5 percent (10 percent applicable curve), and less stable deposits enabled with IMB will have a runoff factor of 12.5 % currently).
In addition, the category “Other Legal Entities” (OLE) will consist of all deposits and other funds of insurance and financial institutions and institutions in the “financial services business”.
Therefore, the funds of non -financial entities such as trusts (educational/religious/charitable), Association of Persons (AOC), associations, properties, limited liability partners and other incorporated entinstials, will be classified as appointments, etc.
These entities will attract a runoff rate or 40 percent (compared to 100 percent prescribed) unless the previous entities are treated as small -companies clients (SBC) under the CSF framework.
What will be the effect of the aforementioned circular in the banks?
According to RBI’s estimate, the Banking CSF will improve in 6% as of December 31, 2024. With an estimated HQLA of almost ₹ 45-50 Lakh Crore for the banking system, this could release the presentable resource 3-3. Banks, compliance with Anil Gupta, senior vice president and group head – classifications of the financial sector, ICRA. This head space can be equivalent to 1.4-1.5 percent of the additional credit growth potential for the banking system.
How much do banks have to align with circular?
The regulatory prescriptions in the circular are effective as of April 1, 2026. The draft had mentioned the effective date of implementation such as April 1, 2025. Then, the banks have one year to adapt to the new regulations.
What is RBI’s opinion about circular?
RBI says that these amendments would help improve the liquuidity resilience of banks in India and further align guidelines with global standards while guaranteeing that such improvement is not disruptive.
Posted on April 22, 2025