Banks' LCR declines to 130% from 135% between September, March: RBI

The RBI report says that banks' efficiency indicators weakened due to rising staff costs and increased cost-to-income ratio

The Liquidity Coverage Ratio (LCR) of banks declined to 130.3 per cent from 135.7 per cent between September 2023 and March 2024, according to the financial stability report of the Reserve Bank of India (RBI).

LCR refers to a requirement whereby banks must hold a stock of high-quality liquid assets (HQLA) sufficient to cover 30 days' net outflows under stressed conditions. These assets include cash, short-term bonds, and other cash equivalents, along with excess Statutory Liquidity Ratio (SLR) and the Marginal Standing Facility (MSF), an emergency liquidity window provided by the RBI. LCR is the financial shield that protects a bank from impending bankruptcy.

The LCR of private banks stood at 126.9 per cent in March 2024 after dipping to 118.8 per cent in the third quarter of the previous financial year.

The report said that banks’ efficiency indicators weakened due to the rising staff costs and an increased cost-to-income ratio. The LCR of banks fell despite them holding substantial liquidity buffers above the regulatory minimum.

RBI Governor Shaktikanta Das announced in April that the central bank had planned to review the LCR framework to enhance liquidity risk management by banks, with a draft circular forthcoming.

The report also noted that the credit-deposit (CD) ratio of banks was nearing its peak, adjusted for reserve requirements. It found that the CD ratio was negatively correlated with banks' excess SLR holdings.

The incremental CD ratio of scheduled commercial banks stood at 90.8 per cent as of May 31, 2024, according to the latest data by the RBI.

The CD ratio measures the proportion of a bank's deposits that have been extended as loans. Essentially, it shows how much of the deposited funds are being used for lending purposes. A high CD ratio suggests that a significant portion of the bank's deposits is tied up in loans, which can increase liquidity and credit risks.