“From Stress to Stability: RBI Eases Liquidity Norms to Empower Digital Banks”

💡 Thematic Focus

Category: Economy | Banking Reform | Financial Regulation

📌 Key Highlights

• New LCR Norms for the Digital Era
  • From April 1, 2026, retail deposits with internet/mobile banking (IMB) will face an additional 2.5% run-off factor, halved from 5% in the draft proposal.
  • Run-off factor = % of deposits expected to be withdrawn during stress. Lower = relief for banks.
• Updated Risk Classifications
  • Stable IMB retail deposits: 7.5% run-off (vs 5% now)
  • Less stable IMB deposits: 12.5% run-off (vs 10% now)
  • Funding from trusts, LLPs, etc.: Now 40% run-off (down from 100%)
  • Small business customer (SBC) funding: Treated like retail, also 2.5% additional run-off.
• High Quality Liquid Assets (HQLA)
  • HQLAs like government securities will be valued after haircut adjustments as per LAF and MSF norms.
• Impact on Banking Liquidity
  • RBI estimates: System LCR to improve by 6% by Dec 31, 2024.
  • Estimated Rs 2.7–3 lakh crore liquidity freed up — equivalent to 1.4–1.5% additional credit growth.
• Rationale
  • RBI: “Aligns with global Basel standards while ensuring non-disruptive domestic transition.”
  • Boosts resilience, digital banking, and credit flow without compromising stability.

🧠 Concept Explainer

What is LCR and Why This Matters Now?

The Liquidity Coverage Ratio (LCR) requires banks to hold enough High-Quality Liquid Assets to survive a 30-day stress scenario. By easing IMB-related run-offs and lowering funding risk weight for non-financial entities, RBI has boosted digital banking flexibility while keeping buffers strong. It’s like giving banks more air in the diving tank — without removing the regulator’s eye from the pressure gauge.

📜 GS Paper Mapping

• GS Paper III:
  • Indian Economy: Banking Sector Reforms, RBI Guidelines, Basel Norms
  • Monetary Policy & Liquidity: Liquidity Adjustment Facility, Financial Stability
  • Infrastructure & Growth: Support for Digital and Credit Expansion

✍️ Essay Paper Mapping

• “In Flow and Form: Building a Resilient Banking System”
• “Liquidity and Lending: The Balancing Act of Financial Inclusion”
• “Digitised Deposits, Real-World Risks: Evolving Banking Regulation”

💭 A Thought Spark — by IAS Monk

“Liquidity is not just about flow — it is the breath of banking. And a breath well-regulated is a system well-prepared.”