The Reserve Bank of India’s (RBI) draft norms proposal may impact bank earnings by 4-11%.
About Liquidity Coverage Ratio (LCR):
- The Liquidity Coverage Ratio (LCR) requires banks to maintain a buffer of high-quality liquid assets to cover potential cash outflows over 30 days.
- LCR is designed to ensure that financial institutions have enough liquid assets to face any short-term liquidity disruptions.
- Formula for LCR:
- LCR = (High-Quality Liquid Assets) / (Total net cash outflows over the next 30 calendar days).
- High-quality liquid Assets (HQLA) include items that can be quickly and easily converted into cash with minimal or no loss in value.
- Examples include cash, short-term government bonds, and certain corporate bonds.
- HQLA can also be used as collateral for borrowing.
- The LCR framework was introduced as part of the Basel III reforms following the 2008 global financial crisis.
- Current status: Scheduled Commercial Banks in India maintain an LCR of 131.4%, which is significantly above the required 100%.
- Impact on banks: While the LCR helps banks stay afloat during financial crises, it may also lead to them holding more cash and issuing fewer loans, which could potentially slow economic growth.
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Frequently Asked Questions (FAQs)
What is liquidity coverage ratio in RBI?
The liquidity coverage ratio (LCR) in RBI is a financial standard that requires banks to maintain enough high-quality liquid assets to cover potential cash outflows over 30 days.
What is the liquidity coverage ratio formula?
The liquidity coverage ratio formula is LCR = (High Quality Liquid Assets) / (Total net cash outflows over the next 30 calendar days).
What is LCR as per Basel III?
As per Basel III, the LCR mandates banks to hold a buffer of high-quality liquid assets sufficient to cover 30 days’ net outflow under stressed conditions, with a minimum LCR of 100% since January 1, 2019.