Whalesbook
Deposit Growth Trails Credit Expansion
India's banking sector is at a critical point, with deposit growth significantly trailing strong credit expansion. By mid-March 2026, year-on-year deposit growth was 10.8%, a sharp slowdown from earlier periods. Credit expansion, however, reached 13.8% in the same timeframe. This gap has pushed the credit-deposit (C-D) ratio to a record 83%, a multi-decade high that exceeds the Reserve Bank of India's preferred range of 75-80%. While a high C-D ratio signals robust credit demand and economic activity, sustained high levels can strain bank liquidity, increase reliance on more expensive wholesale funding, and pose financial stability risks. Consequently, rates on Certificates of Deposit (CDs) have risen to about 7.1%, up from roughly 6% in mid-2025, showing intense competition for funds.
Shift Away From Bank Deposits
The main reason for this deposit shortage is an ongoing shift towards financial assets, as household savings move from traditional bank deposits to higher-yield instruments like equities and mutual funds. By March 2025, equities and mutual funds made up 23% of household financial assets, an increase from 15.7% in March 2019. As a result, the share of low-cost Current Account and Savings Account (CASA) deposits has dropped to a two-year low of 37.9% by December 2025, down from 44.8% in FY22. This structural change reduces banks' access to cheap, stable funding, pushing them to use more expensive term deposits and wholesale markets. Equity mutual funds alone saw significant net inflows of ₹40,450 crore in March 2026.
RBI and Banks Discuss Solutions
The Reserve Bank of India (RBI) recognizes the wider impact on the financial system and has met with scheduled commercial banks to tackle the deposit gathering challenge. Banks have suggested measures like offering differentiated deposit rates—potentially lower rates for financial institutions and higher rates for retail and corporate customers—to better manage funding costs and attract stable deposits. They are also considering new deposit products, such as notice deposits and market-linked deposits. These talks show the central bank's urgency in strengthening banks' funding while maintaining financial stability. Overall, Scheduled Commercial Banks (SCBs) remain healthy, with strong capital and liquidity, and improved asset quality, shown by Gross Non-Performing Assets (GNPAs) falling to a multi-decade low of 2.1-2.2% by September 2025.
Risks to Bank Margins and Stability
The ongoing imbalance between credit and deposit growth presents a significant risk to bank profits. Analysts warn that increasing funding costs, due to higher competition for deposits and more reliance on expensive wholesale borrowing, are squeezing Net Interest Margins (NIMs). Nomura has forecast a delayed and shallower NIM recovery, lowering its estimates by 3-16 basis points for FY27-FY28 because of these margin pressures. While credit growth is expected to stay strong at 11-14.5% for FY27, profitable expansion depends on managing these higher funding costs. The rising C-D ratio, along with the move away from low-cost CASA deposits, creates a structural funding challenge. If not addressed, this could affect banks' lending capacity and pose wider financial stability risks.
Broader Sector View and Outlook
Despite these deposit-related pressures, the Indian banking sector's outlook is largely stable, supported by strong macroeconomic fundamentals. India's GDP growth is forecast around 7.2% in FY27, among the fastest in the G-20. The Nifty Bank index's Price-to-Earnings (P/E) ratio, around 14.98, is seen as attractive, with some views calling it "Significantly Undervalued" at 13.72. Major banks like HDFC Bank and State Bank of India have large market capitalizations, reflecting their scale and investor trust. Analysts predict credit growth will continue at 11-13% in FY27, driven by retail, MSME, and recovering corporate sectors. However, global uncertainties, such as geopolitical tensions and oil price swings, present potential risks, along with ongoing competition for deposits that could keep funding costs high.