Liquidity coverage ratios for PSBs have declined sharply as they ran down their investments (HQLA) to support loan growth. Credit costs for these banks are also likely to inch up with the expected credit loss framework coming into effect from the first quarter of next fiscal, which means the lead PSBs had generated over their private sector counterparts will not stay by the end of the current fiscal.
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“PSBs’ excess liquidity has diminished, with LCR ratios declining sharply as investments (HQLA) have been run down to support growth…With residual liquidity now supporting less than 1 percentage point of incremental loan growth, future growth is likely to be increasingly constrained by deposit accretion,” said Bernstein analysts Pranav Gundlapalle, Ishan Mittal and Anirudh Gupta said.
PSBs’ liquidity coverage ratio (LCR), a measure of how much reserves of highly liquid assets banks hold to survive a severe 30-day hypothetical financial stress scenario, has dropped to 123% in March 2026 from 137% in April last year reflecting an aggressive dip into their reserves to fund credit growth.
PSBs will also have to contend with declining asset quality with expected credit loss (ECL) based provisions kicking in at the start of April. ECL provisions calculate the amount of money banks have to set aside based on the probability of a loan default.
Analysts said that PSBs will have to contend with stronger competition too as large private sector lenders like HDFC Bank, which were pegged back by their own merger issues for most of last year, will be back in the game.Also read: Bank credit grows 17.4% in May as rising yields push companies to loans
“PSBs with rate, liquidity advantage and slower growth by large banks like HDFC have been able to gain credit market share from private banks. This year though, they will be helped by one-time inflows like from FCNR (B) deposits and will have to contend with stronger competition from larger private sector lenders. As a result, there could be a convergence between credit growth of PSB and private sector lenders with expectation that private sector lenders grow faster than PSBs from next fiscal onwards and claim back some market share,” said Anand Dama, head, BFSI, at Nuvama Research.
To be sure, both PSBs and private banks will benefit from the RBI’s special FCNR (B) scheme, which absorbs the entire hedging cost on these deposits, and could lead to a surge in domestic liquidity.