Context: 

In a big relief for banks, the Reserve Bank of India (RBI) has deferred the implementation of the proposed liquidity coverage ratio (LCR) by a year till March 31, 2026. 

Background

• The RBI released a draft circular in July 2024, which required banks to set aside more funds to implement LCR from April 1, 2025.
• The proposed LCR rules require banks to hold a higher proportion of high-quality liquid assets (HQLA), comprising mainly government bonds, to manage a potential liquidity crunch due to any sudden withdrawals of funds. 
• This revised LCR norms would have caused Banks to invest nearly ₹4 lakh crore to buy government bonds instead of extending credit to corporates and individuals.
• Both public sector and private sector banks had asked the RBI for deferment of these norms as they feared they would cause a liquidity crisis in the financial system. 

What is Liquidity Coverage Ratio (LCR)

The LCR was introduced under the Basel III reforms after the global financial crisis in 2008.

The liquidity coverage ratio is a term that refers to the proportion of high-quality liquid assets (HQLA) held by financial institutions to ensure that they maintain an ongoing ability to meet their short-term obligations (i.e., cash outflows for 30 days).

• HQLA are defined by RBI as liquid assets that can be readily sold or immediately convertible into cash at little/no loss of value or can be used as collateral to obtain funds in stressful situations.

Calculation: LCR = [High-Quality Liquid Assets (HQLA)] / (Total Net Cash Outflows over 30 Days) ×100

The LCR aims to anticipate market-wide shocks and make sure that financial institutions are able to ride them out.

LCR intended to make sure that banks and financial institutions have a sufficient level of capital to ride out any short-term disruptions to Liquidity.

In India, RBI issued the final guidelines in 2014 and implemented it between 2015 and January 1, 2019. 

Initially, banks had to maintain 60 per cent HQLA, which was gradually increased to 100 per cent.

Further, all Statutory Liquidity Ratio (SLR) eligible assets, which need to be maintained by the banks as per the Banking Regulation Act, 1949, are permitted to be considered HQLA under LCR requirements if they are in excess.