A report from brokerage Motilal Oswal said the shift toward an LCR-based framework for assessing liquidity and lending capacity will allow banks to deploy surplus liquidity currently parked on their balance sheets into loans. As a result, loan-to-deposit ratios (LDRs) could theoretically rise by 3-12% across the brokerage’s coverage universe, with public sector banks (PSBs) set to be key beneficiaries.
Read more: RBI aligns capital rules of banks with global normsLarge private banks are expected to see a relatively smaller increase in LDRs of 4-11%, while PSBs could see a gain of 6-11%, reflecting their stronger liquidity buffers, the brokerage house estimates.
Unlike the traditional LDR metric, which links lending capacity largely to deposit growth, the LCR framework allows banks to build liquidity buffers from their entire liability base – including deposits, borrowings and equity.
“As long as banks maintain an LCR cushion above the regulatory minimum, excess liquidity parked in low-yielding assets can be redeployed into loans without requiring additional deposit mobilisation, supporting credit growth,” said Nitin Aggarwal, head of BFSI at Motilal Oswal Securities.
Betting on It Rules expected to give banks more space to lend if deposit growth stays steady
Separately, analysts at Macquarie Capital said the LDR constraint is less of an issue for banks such as State Bank of India (SBI), which currently maintains an LCR of around 138%, significantly higher than the roughly 120% levels seen among large private sector peers. This surplus liquidity alone could allow SBI to increase its LDR by 300-400 basis points without breaching LCR requirements, according to the brokerage’s estimates.
Read more: Public sector banks still ahead of private peers in credit growth
Analysts also pointed to optimisation under the Net Stable Funding Ratio (NSFR) framework as another lever for lending expansion. According to Motilal Oswal, better balance-sheet management under the NSFR framework could lift LDRs by 3-23%, with PSBs again better positioned due to their stronger stable funding buffers.
Since the NSFR focuses on one-year funding stability, banks with ratios well above the 100% regulatory threshold can redeploy excess Available Stable Funding – including equity, long-term borrowings and stable deposits – into incremental loans without a proportional increase in deposits. This allows banks to expand lending while maintaining structural funding strength.
“As Indian banks increasingly operate under these liquidity frameworks – similar to global peers – concerns that high loan-to-deposit ratios could constrain lending growth are expected to gradually ease,” Aggarwal added. “This could allow credit growth to outpace deposit growth over time.”
Motilal Oswal said it has assumed a minimum LCR threshold of 108% for banks. With the new guidelines expected to lift the system-level LCR by about 6 percentage points, the effective LCR could rise to around 115%. Any liquidity above this level could be deployed into loans, which offer higher yields than liquid assets. For some mid-sized private banks, the brokerage assumed a slightly higher LCR threshold to account for greater business volatility.