RBI eases liquidity coverage ratio norms

Photo: Pradeep Gaur/Mint

Photo: Pradeep Gaur/Mint

Mumbai: The Reserve Bank of India (RBI) gave bankers more flexibility in maintenance of liquidity coverage ratio (LCR) under Basel III by tweaking certain norms and allowing some corporate bonds to be included in the calculations.

In a circular on Wednesday, RBI said banks can include corporate bonds and commercial papers for reckoning level 2B high-quality liquidity assets (HQLA) provided these corporate papers have a long-term rating between “BBB–” and “A+” from a recognized credit rating agency, are traded frequently in the cash or repo markets and have a track record as a reliable source of liquidity even during stressed conditions.

Level 2B HQLA securities are subject to a haircut of 50% of their market value. Corporate bonds rated “AA–” and above are already included in Level 2A of HQLA under the LCR norms of the central bank.

However, RBI said banks will have to exclude from LCR deposits that have been used as collateral for a loan having maturity of more than 30 days.

Under LCR norms, banks have to provide statements of structural liquidity for different buckets. RBI tweaked these buckets on Wednesday by splitting the 29 days to up to three months bucket into a separate 31 days and up to two months segment and above two months and up to three months bucket.

Under a stated road map to adopt international Basel III standards, RBI had notified draft guidelines for maintaining LCR in April 2012 and subsequently final norms in June 2014. Since then LCR norms have been tweaked twice to include a part of the securities held under statutory liquidity ratio (SLR).

Currently, banks can include 7% of their SLR securities for the purpose of calculating LCR. Banks have to maintain 70% LCR currently and have to reach 100% LCR by January 2019 under Basel III guidelines.