Excess Liquidity in Indian Banks: Who Gains and Who Loses?

Excess liquidity in the banking system can provide banks with a larger cushion of readily available funds, but it also creates a policy and profitability challenge. When banks hold more liquidity than they immediately need for lending or investment, the surplus can weigh on the efficiency of funds deployment. The issue has become particularly relevant as changing monetary and liquidity conditions influence banks’ funding costs, credit growth and treasury strategies.

The impact is uneven across the financial system. Banks with surplus funds may benefit from lower immediate funding pressure and greater liquidity buffers, while borrowers could benefit if stronger liquidity supports credit availability and competitive lending rates. However, prolonged excess liquidity can also reduce the incentive to deploy funds efficiently and affect net interest margins. For treasury and risk teams, the key challenge is to balance liquidity safety with return optimisation, while monitoring asset-liability mismatches, interest-rate risk, credit demand and changing RBI liquidity operations.