The Leverage Ratio (LR) has been reduced by the RBI (Reserve Bank of India) for commercial banks. The steps have been taken by the RBI to help the commercial banks to expand their lending activities. The central bank has reduced the leverage ratio.
The leverage ratio stands reduced to 4% for Domestic Systemically Important Banks (DSIBs) and 3.5% for other banks effective from October 1, 2019.
According to the RBI officials, “Both the capital measure and the exposure measure along with Leverage Ratio are to be disclosed on a quarter-end basis. However, banks must meet the minimum Leverage Ratio requirement at all times”.
- The leverage ratio, as defined under Basel-III norms, is Tier-I capital as a percentage of the bank’s exposures.
- The framework is designed to capture leverage associated with both on-balance sheet exposures, derivative exposures, securities financing transaction exposures and off-balance sheet exposures.
- Tier 1 assets are those which can be easily liquidated if a bank needs capital in the event of a financial crisis. So, it is basically a ratio to measure a bank's financial health.
What do you mean by the term Leverage?
Leverage refers to the investment strategy of using borrowed money specifically. This encourages the use of various financial instruments or borrowed capital to increase the potential return of an investment.
To reduce the debt capital regulators use the ratio of assets to the capital on the bank's balance sheet or its "leverage ratio." A higher leverage ratio means the bank has to use more capital to finance its assets, at least relative to its total amount of borrowed funds.
- Location: India
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