Bank LCR dips in Q4 FY26 as deposit growth lags credit expansion; buffers remain above norms

Banks report lower liquidity coverage ratios (LCR) in Q4 FY26 as credit growth outpaces deposits, though all lenders remain above regulatory requirements.

Slowing deposit growth and increased reliance on bulk funding drag LCR lower across banks, with new Reserve Bank of India norms expected to influence liquidity trends.

Several banks have reported a further decline in the liquidity coverage ratio (LCR) in the fourth quarter of FY26 amid slowing deposit growth, banks’ earnings disclosures showed. For instance, HDFC Bank has cut down LCR to 114% in the March quarter from 116%, Federal Bank has decreased it to 119.9% from 123.9%, while Union Bank of India has decreased its ratio to 113.8% from 123.6% a quarter ago.

Among other large private banks, Kotak Mahindra Bank‘s LCR fell 42 bps to 134.4%, while it stayed flat for ICICI Bank and rose by 1% to 117% for Axis Bank. This is the second straight quarter banks reported a fall in the LCR.

LCR is a key parameter which measures a bank’s capacity to handle sudden funding demands. The norms require banks to hold high quality liquid assets (HQLA) such as government securities or cash to manage sudden cash outflows during a financial stress. It is computed as HQLA divided by total net cash outflows projected over 30 days.

The regulation mandates banks to maintain minimum of 100% as LCR. Though ratios eased, all the lenders have their liquidity position well above regulatory requirement. The LCR has fallen as banks trimmed buffers to fuel higher credit growth, especially in the fourth quarter, said industry experts.

What do observers say?

“Stronger credit off-take compared to deposit growth led banks to explore other avenues of funding growth, which led to lower LCR as investments grew at a slower pace,” said Saurabh Bhalerao, associate director, CareEdge.

Bank credit growth averaged 14.28% in Q4 while deposits grew at an average of 11.73%, the RBI data showed. The gap widened to 255 bps in Q4 from 176 bps in the previous quarter.

“Banks increasingly raised short-term bulk deposits in the final quarter. This will also impact the liquidity coverage ratio because they are liabilities which are due for immediate repayment. It is not a retail or a CASA deposit where you get that benefit while calculating LCR,” said A M Karthik, Senior VP & Co-Group Head-Financial Sector Ratings at ICRA.