State-Run Banks Adjust Liquidity Amid Rising Loan Demand
PSBs tap liquidity buffer to meet strong loan demand
The Economic Times
Image: The Economic Times
State-run banks in India are experiencing a decline in their liquidity coverage ratio (LCR), which has fallen to approximately 114% to 118% in the March quarter, nearing the regulatory minimum of 100%. This drop is attributed to strong loan demand outpacing deposit growth, prompting banks to utilize surplus liquidity to fund loans.
- 01The liquidity coverage ratio (LCR) for major public sector banks fell by 10 to 12 percentage points in Q4FY26 compared to the previous year.
- 02Union Bank of India reported an LCR of 114%, down from 124% a year earlier, with loan growth at 10% and deposit growth at just 3%.
- 03Suresh Ganapathy from Macquarie Capital noted that the current LCR levels limit banks' ability to grow loans without increased deposits.
- 04Canara Bank's LCR decreased to 118% from 125%, with loan growth at 12% and deposits at 10%.
- 05The Reserve Bank of India introduced new norms in April 2025 that will lower the run-off rate for certain entities, potentially improving LCR in Q1 FY27.
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State-run banks in India are facing liquidity pressures as their liquidity coverage ratio (LCR) has decreased to between 114% and 118% in the March quarter, approaching the regulatory minimum of 100%. This decline is primarily due to a surge in loan demand that has outpaced deposit growth, compelling banks to tap into their surplus liquidity. For instance, Union Bank of India reported an LCR of 114%, down from 124% the previous year, with loan growth of 10% against a mere 3% rise in deposits. Similarly, Canara Bank's LCR fell to 118% from 125%, with loans growing by 12% and deposits by 10%. Analysts, including Suresh Ganapathy from Macquarie Capital, indicate that the current LCR levels restrict banks' ability to expand loan portfolios without an increase in deposits. The trend of household savings shifting from traditional bank deposits to higher-yielding alternatives further complicates the situation. However, new regulatory norms set to take effect in Q1 FY27 may alleviate some of these liquidity constraints by adjusting the run-off rates for certain entities.
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The decline in liquidity coverage ratios may lead to tighter lending conditions, affecting borrowers seeking loans from state-run banks.
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