Whalesbook
Stretched Balance Sheets
India's banks are navigating a period of significant funding strain, marked by an unprecedented 83% credit-deposit ratio. This record level shows loan demand far outstripping the growth in customer savings, forcing lenders to seek costlier ways to fund operations and potentially impacting future profitability.
The credit-deposit ratio hit an all-time high of 83.04% as of March 15, 2026, reflecting a significant gap between loan disbursements and deposit accumulation. Aggregate deposits contracted by ₹1.8 lakh crore in the fortnight ending March 15, reaching ₹250.1 lakh crore, while bank credit saw a net increase of ₹18,672 crore, pushing it to ₹207.7 lakh crore. This dynamic has driven the incremental credit-deposit ratio to 103.9% for the financial year, meaning banks are disbursing over ₹103 in fresh loans for every ₹100 of new deposits gathered. While the reported credit growth for the financial year stood at 13.8%, deposit growth lagged at 10.8%. Historically, a credit-deposit ratio around 80% has been considered a healthy benchmark, allowing for regulatory reserves while deploying a substantial portion of funds into lending. The current elevated level, surpassing previous peaks seen between late 2022 and late 2023, signals that banks are operating with significantly reduced liquidity buffers.
Why Deposits Are Lagging
This widening gap between credit and deposit growth points to deeper structural shifts and increasing funding pressures. Banks are increasingly relying on Certificates of Deposit (CDs) and other wholesale funding markets to bridge the shortfall, pushing the outstanding CDs to a record ₹6.6 lakh crore by late February 2026. This reliance on short-term, market-linked borrowing comes at a higher cost, with CD yields rising to approximately 7.1% despite policy rate cuts. Analysts at Nomura predict this trend will lead to margin pressure (Net Interest Margin - NIM) in fiscal year 2027, as banks' funding costs increase faster than their asset yields. The Reserve Bank of India (RBI) has voiced concerns, cautioning banks to monitor the credit-deposit gap to avert future structural liquidity issues. Changes in people's savings habits, with a growing preference for market-linked instruments like mutual funds and equities over traditional bank deposits, further complicate the challenge of gathering deposits. This erosion of CASA (Current Account and Savings Account) balances, particularly at private banks, raises the overall cost of funds and constrains lending capacity. Projections for FY27 anticipate credit growth to remain robust at 13-14.5%, while deposit growth is expected to moderate to 11-12%, suggesting the funding challenge is likely to persist.
Risks Rise as Liquidity Tightens
The sustained high credit-deposit ratio creates significant risks. Banks are lowering their liquidity buffers (LCRs) by lending out excess funds. This approach has a limited lifespan and won't last forever. The increased dependence on costly wholesale funding, such as CDs, directly pressures net interest margins, potentially squeezing profitability. Furthermore, as liquidity tightens and funding costs rise, banks may become more selective in their lending, potentially impacting the credit availability for crucial sectors like Micro, Small, and Medium Enterprises (MSMEs), which often rely on steady, accessible funding. The elevated delinquency risk in unsecured retail portfolios, which are growing rapidly, also poses a threat if economic conditions falter. While the RBI has been active in managing liquidity, the systemic nature of deposit outflows and the increasing reliance on market borrowings create a vulnerability that external shocks, such as geopolitical instability, could amplify. The shift of savings away from traditional bank deposits suggests a long-term challenge in replenishing the deposit base without significantly increasing borrowing costs.
Outlook for Funding and Lending
Looking ahead, the Indian banking sector faces a balancing act. While credit growth is projected to remain healthy, driven by sustained retail demand and corporate borrowing, the ability to fund this expansion will be heavily contingent on deposit mobilization. Analysts anticipate that banks will continue to face funding challenges, leading to potentially higher costs for borrowers and sustained pressure on bank margins through fiscal year 2027. How effectively banks innovate deposit-gathering strategies and how the RBI manages systemic liquidity will be key to sustainable credit growth and overall economic growth.