The Reserve Bank of India's revised Liquidity Coverage Ratio guidelines became effective on 1 April 2026, requiring all commercial banks to add a 2.5% additional run-off rate for digital deposits, apply haircuts to government securities held as High-Quality Liquid Assets, and reclassify deposits from non-financial entities at a significantly reduced run-off rate. The amendments, which align India's LCR framework more closely with global Basel III standards, are projected to improve the aggregate LCR of Indian banks by approximately 6 percentage points.
Background
The LCR framework requires banks to maintain sufficient liquid assets to cover net cash outflows over a 30-day stress period. The RBI had issued draft amendments in late 2024, recognising that the rapid growth of digital banking had created new liquidity risk dynamics not adequately captured by the original framework.
The concern was straightforward: deposits held through internet and mobile banking can be withdrawn significantly faster than traditional branch-based deposits, as customers can move funds with a few taps rather than visiting a physical branch. This velocity of withdrawal increases liquidity risk during stress scenarios, requiring banks to hold additional liquid assets as a buffer.
Key Provisions
The revised framework introduces three material changes:
Digital deposits buffer: An additional run-off rate of 2.5% applies to retail and small business deposits made through internet and mobile banking channels. The RBI reduced this from the originally proposed 5% after considering industry feedback on implementation costs.
Government securities haircuts: Banks must now apply haircuts to the market value of Government Securities classified as Level 1 HQLA, in accordance with margin requirements under the Liquidity Adjustment Facility and Marginal Standing Facility. This ensures the LCR calculation reflects realistic liquidation values.
Non-financial entity reclassification: The definition of "other legal entities" under unsecured wholesale funding has been narrowed to include only financial sector entities. Deposits from non-financial entities such as trusts, partnerships, proprietorships, and LLPs will now attract a 40% run-off rate, down from the 100% rate previously applied. This reduces the liquidity burden on banks significantly.
Scope: The guidelines apply to all commercial banks except payments banks, regional rural banks, and local area banks.
Implications for Practitioners
For bank treasury teams and compliance officers, the immediate operational task is recalibrating LCR computation models to incorporate the digital deposit buffer and revised entity classifications. Banks with a higher proportion of digital-channel deposits will see a larger impact on their LCR requirements.
Banking lawyers should note that the reclassification of non-financial entity deposits from 100% to 40% run-off rate represents a significant relaxation that could influence deposit product structuring. Banks may find renewed incentive to attract deposits from trusts, associations, and LLPs that were previously penalised under the wholesale funding classification.
For fintech companies operating in the digital lending and deposit-taking space through partnerships with banks, the 2.5% digital buffer may indirectly affect the commercial terms of their arrangements, as partner banks factor the additional liquidity cost into their pricing models.
Frequently Asked Questions
Will the revised LCR norms cause banks to raise deposit rates?
The net impact is mixed. The digital deposit buffer increases liquidity costs marginally, but the reclassification of non-financial entity deposits from 100% to 40% run-off rate provides substantial relief. The RBI's impact analysis projects all banks will meet minimum LCR requirements comfortably, suggesting no immediate pressure on deposit pricing purely from the LCR changes.