LCR and NSFR Ratios Explained for CAIIB BFM Exam Prep
For CAIIB candidates tackling Bank Financial Management, the LCR and NSFR ratios are among the highest-yield topics you can master. These two Basel III liquidity standards decide whether a bank can survive a 30-day stress event and whether its funding is stable over a one-year horizon. This guide explains the LCR and NSFR ratios with formulas, thresholds, and exam-ready worked logic so you walk into the BFM paper confident.
What the LCR and NSFR Ratios Measure
The LCR and NSFR ratios are the twin liquidity pillars introduced by the Basel Committee after the 2008 crisis, when many banks were well-capitalised yet still collapsed because they ran out of cash. Capital adequacy answers "is the bank solvent?"; liquidity ratios answer "can the bank pay its bills on time?". The two questions are different, and BFM tests both.
- Liquidity Coverage Ratio (LCR) is a short-term measure. It checks whether a bank holds enough high-quality liquid assets (HQLA) to survive a severe 30-day cash outflow scenario.
- Net Stable Funding Ratio (NSFR) is a structural, long-term measure. It checks whether a bank funds its activities with sufficiently stable sources over a one-year horizon, reducing reliance on volatile short-term wholesale money.
In India, the RBI phased in the LCR from 1 January 2015, reaching the full 100% requirement on 1 January 2019. The NSFR became applicable from 1 October 2021. Both apply to scheduled commercial banks (excluding regional rural banks, local area banks and payment banks in the standard framework). Understanding the intent behind each ratio makes the numerical questions much easier. For structured revision of the full BFM syllabus, the CAIIB course on iibf.store walks through each module with solved examples.
The LCR Formula and the 100% Floor
The Liquidity Coverage Ratio is defined as:
LCR = Stock of High Quality Liquid Assets (HQLA) / Total Net Cash Outflows over the next 30 calendar days ≥ 100%
The regulatory minimum is LCR ≥ 100%, meaning a bank must hold at least one rupee of HQLA for every rupee of expected net outflow in a 30-day stress window.
What counts as HQLA
- Level 1 assets — cash, excess CRR, government securities (SLR and beyond, including under MSF/FALLCR), and qualifying central-bank reserves. Counted at 100%, no cap.
- Level 2A assets — certain high-rated corporate bonds and PSU securities, subject to a 15% haircut.
- Level 2B assets — lower-rated corporate bonds and qualifying equities, with deeper haircuts (25%-50%). Level 2 assets together are capped at 40% of total HQLA, and Level 2B within that at 15%.
Computing net cash outflows
Total net cash outflows = total expected outflows minus the lesser of (total expected inflows) or (75% of total expected outflows). This 75% cap ensures a bank cannot assume it will be fully rescued by incoming cash. Outflows are weighted by run-off factors (for example, stable retail deposits attract a 5% run-off, less stable retail 10%, unsecured wholesale far more). Practise these weightings using the timed MCQs on iibf.store tests until the run-off factors become second nature.
The NSFR Formula and Stable Funding Logic
The Net Stable Funding Ratio is defined as:
NSFR = Available Stable Funding (ASF) / Required Stable Funding (RSF) ≥ 100%
Like the LCR, the regulatory floor is 100%, but the horizon is one year and the focus shifts from asset liquidity to funding stability.
Available Stable Funding (the numerator)
ASF is the portion of capital and liabilities expected to remain with the bank over one year, each multiplied by an ASF factor reflecting stability:
- Tier 1 and Tier 2 capital and liabilities with effective maturity ≥ 1 year — 100% ASF.
- Stable retail and small-business deposits (less than 1 year) — 95% ASF.
- Less stable retail deposits — 90% ASF.
- Wholesale funding from non-financial corporates (less than 1 year) — 50% ASF.
- Short-term funding from financial institutions — 0% ASF, because it is the flightiest.
Required Stable Funding (the denominator)
RSF weights assets by how illiquid or long-dated they are. Cash and short-term claims on banks carry low RSF factors; unencumbered residential mortgages and performing loans carry higher factors; illiquid, encumbered or long-term assets approach 100% RSF. The intuition: long-lived assets must be backed by long-lived funding. To cement these factors, the gamified drills on iibf.store match games let you pair each asset class with its correct RSF weight quickly.
Worked Example and Common Exam Traps
Suppose a bank reports HQLA of Rs 600 crore, expected 30-day outflows of Rs 800 crore and expected inflows of Rs 300 crore. Inflows are capped at 75% of outflows = Rs 600 crore, but actual inflows of Rs 300 crore are lower, so we use Rs 300 crore.
- Net cash outflows = 800 − 300 = Rs 500 crore.
- LCR = 600 / 500 = 120%, comfortably above the 100% floor.
Now suppose inflows were Rs 700 crore. The 75%-of-outflows cap (Rs 600 crore) binds, so net outflows = 800 − 600 = Rs 200 crore, and LCR = 600 / 200 = 300%. The cap is the single most common trap in BFM LCR sums.
Mistakes to avoid
- Forgetting the 40% Level 2 cap and 15% Level 2B sub-cap when computing HQLA.
- Applying inflows in full instead of the 75% cap.
- Confusing the LCR (30-day, asset-side) with the NSFR (1-year, funding-side).
- Ignoring haircuts on Level 2A (15%) and Level 2B (25%-50%) assets.
Keep current RBI thresholds handy via the live RBI rates reference, and track any framework tweaks through IIBF news updates so your numbers match the latest circulars.
For authoritative guidance, refer to the official resources of the Reserve Bank of India and the Indian Institute of Banking & Finance.
Frequently Asked Questions
What is the minimum LCR a bank must maintain?
Under Basel III and RBI norms, banks must maintain a Liquidity Coverage Ratio of at least 100%. This means high-quality liquid assets must fully cover total net cash outflows expected over a 30-calendar-day severe stress scenario. The 100% floor became fully applicable in India from 1 January 2019.
How do the LCR and NSFR ratios differ?
The LCR is a short-term, 30-day measure of whether liquid assets cover stressed outflows. The NSFR is a structural, one-year measure of whether stable funding sources support a bank's assets. LCR focuses on asset liquidity; NSFR focuses on funding stability. Both carry a 100% minimum but answer different liquidity questions.
What qualifies as High Quality Liquid Assets (HQLA)?
HQLA are assets easily converted to cash with little loss. Level 1 assets (cash, excess CRR, government securities) count fully with no cap. Level 2A assets take a 15% haircut and Level 2B deeper haircuts; together Level 2 is capped at 40% of total HQLA, with Level 2B sub-capped at 15%.
Why is the cash inflow capped at 75% in LCR?
The 75% cap on inflows ensures a bank holds a minimum buffer of HQLA and cannot assume it will be fully bailed out by incoming cash during stress. Total net cash outflows equal outflows minus the lesser of actual inflows or 75% of outflows, forcing prudent self-reliance.
Conclusion: Lock In These Ratios Before Your BFM Exam
Mastering the LCR and NSFR ratios rewards you with reliable marks because the formulas, the 100% floors, the HQLA caps and the 75% inflow rule appear in the BFM paper year after year. Revise the intuition first, then drill the numericals until the run-off and ASF/RSF factors are automatic. Ready to test yourself under timed conditions? Attempt a full mock on iibf.store tests, then strengthen any weak module with the structured CAIIB course. For more BFM explainers, browse the iibf.store blog.
Take a free mock test, download chapter PDFs, or watch a video class — all included on iibf.store.
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