The new liquidity coverage ratio (LCR) norms that took effect in April have helped banks improve their ratio as well as freed up liquidity to support credit growth at a time when deposit growth is lagging.
Under the revised norms, deposits from non-financial entities such as trusts (educational, charitable and religious), partnerships and limited liability partnerships (LLPs) now carry a lower run-off factor of 40%, compared with 100% earlier. The run-off factor indicates the likelihood of deposits being withdrawn from a bank. A higher run-off factor requires banks to hold more high-quality liquid assets (HQLA), mainly government securities, that can be quickly liquidated during periods of financial stress. The lower requirement has allowed banks to deploy some of the freed-up funds for credit growth.
Q1 FY27 LCR Trends
At the same time, several banks reported a rise in their LCR in the first quarter of FY27 after two consecutive quarters of decline.
HDFC Bank increased its LCR by 100 basis points to 115% in the June quarter, while Kotak Mahindra Bank raised it to 143.8% from 134.4%. Union Bank of India’s LCR rose to 121.3% from 113.8% a quarter earlier.
Among other large private sector banks, Axis Bank’s LCR rose 200 basis points to 119%, while ICICI Bank’s declined by 200 basis points. YES Bank saw a sharp increase in its LCR to 138.2% from 119% a quarter earlier.
The Reserve Bank of India had estimated that the revised norms would improve the banking sector’s LCR by about 6%. The relief allows banks to free up liquidity and support credit demand, although the benefit will vary depending on the share of such wholesale deposits in their deposit base.
Deploying Freed-Up Liquidity
“The improvement in LCR seen across several banks in Q1 FY2027 draws support from the new LCR norms, which took effect from April 2026. Given that incremental deposits continue to lag incremental credit offtake, banks would utilise part of their available surplus investments to fund credit growth and support their yields,” said Sachin Sachdeva, vice-president and sector head at ICRA.
Saurabh Bhalerao, director at CareEdge Ratings, said the revised norms had freed up liquidity, enabling banks to support stronger credit growth. “One reason why credit growth is at 18.6% while deposits are only rising about 13% is that banks are tapping other funding sources, and the LCR relief has made that liquidity more usable,” he said.
LCR is a key measure of a bank’s ability to withstand sudden funding pressures. Banks are required to hold HQLA, such as government securities and cash, to meet potential cash outflows during a period of financial stress. The ratio is calculated as HQLA divided by projected net cash outflows over 30 days, with banks required to maintain a minimum LCR of 100%.
“Going ahead, in the absence of any structural driver, LCR levels are likely to be sustained at current levels,” Sachdeva said. However, the timing of expected sizeable inflows from FCNR(B) deposits could temporarily lift LCRs. “The funds may take some time to get deployed and, meanwhile, may get parked in SLR securities, temporarily lifting LCR in the interim,” he added.
The revised LCR norms also require banks to apply an additional run-off factor of 2.5%, instead of the proposed 5% in the draft norms, on retail and small business deposits linked to internet and mobile banking (IMB). While this is a negative for banks, the lower run-off factor on wholesale deposits from non-financial entities is expected to more than offset the impact.