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Source- This post on the Liquidity Coverage Ratio (LCR) has been created based on the article “RBI’s proposed norms on LCR could be a dampener for some banks” published in “Moneycontrol” on 1 August 2024.
Why in the news?
The Reserve Bank of India (RBI) recently issued draft guidelines for banks on the Liquidity Coverage Ratio (LCR). RBI has asked the banks to hold a higher stock of liquid securities as a buffer on deposits.
About Liquidity Coverage Ratio (LCR)
| Definition | Liquidity Coverage Ratio (LCR) refers to the proportion of highly liquid assets held by financial institutions to ensure they can meet short-term obligations. The short term obligation means maintaining the cash outflows for 30 days. |
| Purpose | It ensures banks and financial institutions have sufficient capital to handle short-term liquidity disruptions. |
| Origin | It has originated from the Basel III agreement. |
| Calculation | LCR = (High-Quality Liquid Assets (HQLA)) / (Total net cash outflows over the next 30 calendar days). * HQLA- These are assets that can be easily and quickly converted into cash with minimal or no loss of value. These include cash, reserves with central banks, central government bonds. SLR securities are also a part of HQLA. |
UPSC Syllabus: Indian Economy
