The given statement is true.
Higher liquidity often leads to idle cash reserves, which reduces profitability.
This is true.
Higher liquidity means that the more amount of money in cash that you have. If you have idle cash that is not invested or saved anywhere, it will not yield anything. The money that is invested or saved in various schemes yield interest. The idle cash reserve yields nothing. This is the reason, the profitability reduces.
Say for example - If the same idle money is invested somewhere, it will yield some profit at some point of time.
