Whalesbook
The Widening Credit-Deposit Gap
The Indian banking sector is facing a widening gap between loan growth and deposit mobilization. Projections for fiscal year 2027 indicate credit growth likely between 12% and 14.5%, significantly outpacing anticipated deposit growth of 10% to 12%. This imbalance has pushed the aggregate credit-deposit (CD) ratio to an all-time high, reaching approximately 83% by mid-March 2026. This elevated ratio signals that banks are increasingly relying on more expensive funding sources. This trend is exacerbated by a notable decline in low-cost Current Account Savings Account (CASA) deposits, which fell to 37.9% in the December 2025 quarter. This move from cheap CASA deposits to pricier term deposits and wholesale funding is increasing banks' costs.
Profit Margins Under Pressure
This funding trend is squeezing banks' Net Interest Margins (NIMs). Analysts are cutting earnings forecasts due to higher funding costs and slow NIM recovery. As of December 2025, only a few banks reported year-on-year NIM improvement. New Liquidity Coverage Ratio (LCR) rules from April 1, 2026, will free up about ₹2.7-3 trillion in liquidity but won't fix the underlying cost issue. RBI data shows loans have consistently grown faster than deposits for over a decade, forcing banks to find pricier funding to meet demand.
Dependence on Costly Funding
The ongoing gap between loan and deposit growth signals a deeper structural issue for Indian banks' funding. As depositors chase higher returns elsewhere, CASA deposits fall, forcing banks to rely more on volatile wholesale funding and costly term deposits. This raises the cost of funds, hurting profits, especially for banks with weaker retail deposit bases. For example, State Bank of India's (SBI) CASA ratio was approximately 39.13% in December 2025, while the system-wide average has compressed significantly. Banks like HDFC Bank have a higher CASA ratio around 41%, offering a buffer. Overall, competition for deposits is intensifying, pushing up funding costs and pressuring NIMs across the sector. The P/E ratio for Indian Bank was around 11.07x in April 2026, while the Nifty Bank Index P/E was around 14.98x.
Outlook: Banks with Strong Deposits Poised to Perform
Projected GDP growth of 6.5%-7.2% for FY27 supports loan demand. However, global events like geopolitical tensions and supply chain issues create volatility, affecting energy prices and company profits. Analysts expect banks with strong retail deposit bases, good cost control, and solid capital reserves will navigate this tough funding climate best. Banks relying heavily on wholesale funding or with weaker deposit bases face higher risks of margin cuts and funding shortages. The outlook suggests analysts will keep watching NIM trends, adjusting earnings and price targets for FY27, due to the ongoing credit-deposit gap hurting bank profits.