Liquidity Coverage Ratio (LCR) - Indian Economy UPSC Notes
(LCR) is a financial rule that ensures banks and large NBFCs always have enough cash or cash-like assets to cover their short expenses during a crisis
Liquidity Coverage Ratio (LCR) Explained Simply with Example What is LCR? The Liquidity Coverage Ratio (LCR) is a financial rule that ensures banks and large Non-Banking Financial Companies (NBFCs) always have enough cash or cash-like assets to cover their short-term expenses during a financial crisis. It is calculated as: LCR = High-Quality Liquid Assets (HQLA) Net Cash Outflows over 30 days \text{LCR} = \frac{\text{High-Quality Liquid Assets (HQLA)}}{\text{Net Cash Outflows over 30 days}} Where: HQLA (High-Quality Liquid Assets) : These are assets that can be quickly converted into cash without losing much value. Examples: Cash, Government Securities, Bonds issued by foreign governments . Net Cash Outflows : The difference between expected cash outflows (money the bank must pay) and cash inflows (money the bank will receive) in the next 30 days. Why was LCR Introduced? After the IL&FS (Infrastructure Leasing & Financial Services) and DHFL (Dewan Housing Finance Limited) crises , the Reserve …