PSBs tap liquidity buffer to meet strong loan demand

Mumbai: (LCR) at state-run banks moved closer to the minimum regulatory thresholds in the March quarter as the scramble for intensified amid unabated demand for loans. The LCR for major fell 10 to 12 percentage points in the fourth quarter to about 114% to 118%, closer to the regulatory threshold of 100%. Falling LCR is one of the first signs of liquidity pressures at banks.

To help hurdle the barrier of that pronouncedly lagged the demand for loans, these lenders deployed surplus liquidity, skewing the LCR from year-ago levels that had provided ample buffers.

For example, reported an LCR of 114% in Q4FY26, from 124% a year earlier. The bank’s loan growth stood at 10%, while deposits grew by just 3% during the period. At , the LCR fell to 118% from 125% last year, while loan and deposit growth stood at 12% and 10% respectively. saw its LCR decline to 124% in Q4FY26 from 133% a year ago, even as loans grew 17% compared with deposit growth of 11%. “PSU banks are running down LCR to fund the credit growth and current levels of LCR now no longer offer much room to grow loans without deposits and that is where the challenge is for PSU banks,” said Suresh Ganapathy, head of financial services research at Macquarie Capital.

“The easy narrative of gaining loan market share by funding loans through excess liquidity is running out,” Ganapathy said.

Indian banks are struggling to mobilise retail deposits because household savings are moving away from traditional bank deposits into higher-yielding or market-linked alternatives, even as credit demand in the economy remains strong. Deposit growth has not kept pace with credit growth in the last couple of years, as banks are shy to offer higher rates to protect margins, forcing banks to dip into their excess liquidity.

The one-year FD at yields 6.25%, while debt MFs give return between 6% and 9%. This problem of low LCR is expected to decrease in Q1 FY27 as new norms kick in. In new norms that the regulator released in April 2025, trusts, partnerships, LLPs will attract a lower run-off rate of 40% in FY27, as against 100% in FY26.