Include MFs & bonds as high-quality assets for calculating LCR: Banks

New Delhi : With Reserve Bank’s new liquidity standards expected to take effect April 2025, banks have pitched for the inclusion of mutual fund investments and tradable bonds as high-quality liquid assets (HQLA) in the calculation for the liquidity coverage ratio, people familiar with the deliberations said.Lenders have argued that such investments are highly liquid, comparable to lower-quality assets and that their inclusion in liquidity calculations could reduce the share of deposits banks must allocate for liquidity ratios, thereby freeing up capital for lending, they said.

Banks have flagged this in a representation to the finance ministry, emphasising that additional liquid coverage ratio (LCR) requirements should be justified with data-driven rationale, an official said.

The liquidity coverage ratio is the proportion of high-quality liquid assets (HQLA) that financial institutions hold to allow them to survive a period of significant liquidity stress lasting 30 calendar days.

Under existing regulations, investment in mutual funds is not considered as part of HQLA for calculating LCR. The other components of HQLA include cash, central bank deposits, and high-quality government securities.

A bank executive said that last month some senior industry executives also met with the RBI, and they expect some relief from the regulator on the matter. “We have also requested that the entire Cash Reserve Ratio, or CRR, should be considered while assessing high-quality liquid assets,” he said, adding that existing regulations allow only excess CRR balance as part of Level 1 of HQLA. In July, the RBI had come out with a draft circular on the Basel III framework regarding liquidity standards. Besides an additional 5% run-off factor on the internet and mobile banking (IMB)-enabled retail deposits and certain small business deposits, it has also proposed restricting the value of government securities (G-secs) forming a part of level 1 high HQLAs to the market value.According to the rating agency ICRA, due to the proposed changes, credit growth may moderate as lenders deploy a higher share of deposits to the HQLA.

“To recoup the LCR loss, banks may focus more on retail deposits, reducing the share of wholesale deposits,” it said in a research note, adding that the proposed changes to LCR guidelines will reduce the system-wide reported LCR by 14-17% from 130% reported during Q4’2023-24 to 113-116% on account of higher run-off factors for certain deposits and haircuts on the HQLA.