It is often said that profit is a reward for risk-bearing and nowhere is this truer than in the case of the banking industry. In the course of their operations, banks are invariably faced with different types of risks that may have a potentially adverse effect on their business. It is essential that banks should effectively manage different types of risks in order to maximise their profits and to safeguard the interest of their various stakeholders. In its important step towards better risk management and for promoting a more resilient banking sector, the ‘Basel III International framework for liquidity risk measurement, standards and monitoring’was issued in December 2010 with some more add-ons. The Basel Committee had prescribed two minimum standards viz Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) for funding liquidity to achieve two separate but complementary objectives. In addition, a set of monitoring tools were also prescribed for monitoring the liquidity risk exposures of banks.

 
Liquidity Coverage Ratio
 

The liquidity coverage ratio refers to highly liquid assets held by financial organisations to meet short-term obligations. The ratio is a generic stress test that aims to anticipate market-wide shocks and promotes short-term resilience of banks to potential liquidity disruptions by ensuring that they have sufficient high-quality liquid assets (HQLAs) that can be converted into cash to meet its liquidity needs for a 30 calendar day time horizon under a significantly severe liquidity stress scenario specified by supervisors.

 

 

The LCR requirement was binding on banks from January 1, 2015. However, to provide a transition time for banks, Reserve Bank of India (RBI) had permitted a gradual increase in the ratio starting with a minimum 60 percent for the calendar year 2015.

 
 
 
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