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The sustained surge in bank credit growth, which has outpaced deposit accretion throughout the fiscal year, is now exerting noticeable pressure on system liquidity. By January 2026, the incremental credit-deposit ratio neared 97%, a sharp ascent from the overall ratio of 82.3% [cite: Source A]. This situation necessitates banks to actively manage their funding costs to maintain lending momentum, a trend that is becoming increasingly critical for profitability.
The Structure
Credit Growth vs. Deposit Dynamics
Aggregate deposits grew 10.2% in the financial year up to January 31, 2026, while credit expanded at a faster pace of 12.2% [cite: Source A]. On a year-on-year basis, credit growth reached a 19-month high of 14.6% by end-January 2026, significantly outpacing deposit growth of 12.5%. This divergence has led major banks like State Bank of India (SBI) to revise their credit growth guidance upwards to 13-15% for the year, fueled by a substantial pipeline [cite: Source A]. Similarly, ICICI Bank observed sustained momentum across retail and corporate segments [cite: Source A]. However, this robust lending is increasingly funded by household savings rather than surplus central bank liquidity, directly linking credit expansion to economic activity [cite: Source A].
Liquidity Strain and Funding Costs
Despite overall system liquidity remaining in surplus, as indicated by Rs 3.03 lakh crore average on February 12, 2026, specific segments face tightness. Banks have increased their reliance on wholesale funding, pushing outstanding Certificates of Deposit (CDs) to record levels of approximately Rs 5.3-5.4 trillion. This has caused CD rates to harden, with one-year CDs crossing 7.0%, up from around 6.65% earlier. This trend suggests that while overall liquidity might appear sufficient, the cost of funding is rising for banks needing to replenish their deposit base. Analysts note that the RBI's approach of allowing excess liquidity to linger might be to facilitate monetary policy transmission, but it also creates arbitrage opportunities for banks that can park funds with the RBI rather than lend them. The credit-to-deposit ratio for HDFC Bank stood at an elevated 98.7% as of the December 2025 quarter, with a stated aim to reduce it to 92-96% in FY26. This highlights the broader industry challenge of matching deposit growth to ambitious credit targets.
Valuation and Market Performance
As of mid-February 2026, major banks show varied valuations. SBI, reaching an all-time high of Rs 1153.85 on February 10, 2026, traded with a P/E ratio around 13.03x and a market capitalization of approximately ₹1.106 lakh crore. ICICI Bank, trading around ₹1414.6, had a P/E of 19.10x and a market cap of roughly ₹10.11 lakh crore. Canara Bank, considered attractively valued by MarketsMOJO with a 'Buy' rating, traded at a P/E of approximately 7.61x and a market cap around ₹1.28 lakh crore. While these large banks show strength, the broader market sentiment can be influenced by liquidity conditions, with some sector peers facing headwinds. For instance, HDFC Bank, despite high trading volumes, continued its downtrend and was downgraded to 'Sell' by MarketsMOJO on February 9, 2026, citing cautious investor sentiment.
The Bear Case
While credit growth appears robust, the widening gap between credit and deposit mobilization poses significant risks. The increasing reliance on costly wholesale deposits (CDs) and term deposits at higher yields (6-7%) is eroding the advantage of lower Casa ratios, which have fallen to approximately 37% from 42% in March 2022. This funding pressure can compress Net Interest Margins (NIMs) if not managed effectively. The Reserve Bank of India's (RBI) liquidity measures aim to support transmission, but sustained tightness in specific funding markets, evident in rising CD rates, suggests that banks must work harder to secure funds. Historically, periods of high credit-to-deposit ratios have been cushioned by strong CASA growth; however, with CASA shrinking and competition intensifying, banks like HDFC Bank are actively working to bring down their elevated ratios, indicating the strain of this imbalance. A prolonged period of expensive funding or a slowdown in deposit growth could challenge the sustainability of current credit expansion paces and potentially impact asset quality if lending standards are relaxed to maintain growth.
Future Outlook
Axis Bank's CEO has stressed that deposit growth must accelerate to sustain credit expansion, cautioning that single-digit or low double-digit deposit growth may not suffice. While the RBI has assured liquidity support, the focus for banks will be on balancing aggressive credit targets with cost-effective deposit mobilization. The sector outlook remains cautiously optimistic, supported by projected GDP growth of 6.4% for FY26-27 and the recent India-US trade deal, but funding costs and liquidity management will be critical determinants of future profitability.