Whalesbook
Credit Growth Continues to Outpace Deposits
Recent data for the fortnight ending March 15, 2026, shows a complex situation for India's banks. Although year-on-year deposit growth rose to 10.8%, slightly below credit growth's 13.8%, short-term figures are more challenging. Deposits fell 0.7% on a fortnightly basis, largely due to significant advance tax outflows—a common seasonal pressure. Credit, however, grew only marginally by 0.1%. This trend, where credit expansion consistently exceeds deposit accumulation, has pushed the credit-deposit (CD) ratio to an all-time high above 83% as of March 15, 2026. This marks a notable increase from around 82.5% in February and 82% in January, indicating banks are using a large portion of their deposits for lending, potentially straining liquidity.
Pressure on Bank Funding and Profits
The continuous gap between credit and deposit growth presents a structural problem for the banking industry, going beyond temporary seasonal changes or reporting adjustments. Analysts warn this widening difference puts significant pressure on banks' funding costs and net interest margins (NIMs). As deposits lag, banks are forced to use more expensive funding sources like certificates of deposit (CDs) and wholesale borrowings. These have seen record issuances and rising rates. Relying on costlier funds, along with a drop in low-cost CASA deposits, suggests future profits could face difficulties, even if overall credit growth remains strong. The shift of household savings into market-linked investments further complicates attracting traditional deposits.
Outlook for Indian Banks Amid Challenges
Despite these funding difficulties, the overall outlook for the Indian banking sector remains cautiously positive, supported by expected economic growth and better asset quality. Analysts predict credit growth will stay healthy, projected between 13-14.5% for FY27. However, the persistent lag in deposit mobilization is seen as a key risk. Banks with strong capital and robust liability management are expected to perform better. While some analysts find valuations more attractive after recent market drops, geopolitical risks, especially related to the Middle East conflict and oil prices, remain a concern. The market is monitoring for de-escalation and stable energy prices, which are vital for India's economy given its reliance on imports.
Key Risks: Funding Costs and Liquidity
The main risk for banks is their ability to keep credit growth going without dramatically increasing funding costs or compromising asset-liability management. The record-high CD ratio points to a tightening liquidity situation, forcing banks into a strong competition for deposits. This situation can disproportionately affect smaller banks or those with weaker deposit bases. Nomura has warned that margin recovery might be delayed and less significant than expected, as NIMs already show signs of shrinking due to deposit repricing matching loan yields. Increasing reliance on wholesale funding, while managing short-term liquidity, raises vulnerability to interest rate changes and could limit the impact of monetary policy easing. Additionally, the changing regulatory environment, including the shift to weekly credit data reporting from April 2026, aims to improve transparency but also highlights the critical need for timely and accurate funding management.
Banks' Path Forward
Looking ahead, banks must carefully balance meeting strong credit demand with attracting sufficient, cost-effective deposits. Credit growth is expected to remain firm, driven by retail, MSME, and corporate borrowing. However, the pressure on deposit gathering is likely to continue. This will require banks to adapt their funding strategies and maintain a focus on operational efficiency to protect profits amid increasing competition and changing market conditions.