Whalesbook
Loans Surge Ahead of Deposits
Indian banks are seeing a sharp rise in lending. Credit has expanded by 16% year-on-year, up from 15% just two weeks prior. This strong demand for loans is meeting slower deposit growth of 12.3%, a small increase from 12.2%. As a result, the credit-deposit (C/D) ratio reached 82.01% by the end of April. This ratio, showing how much of deposits banks lend out, is now above the Reserve Bank of India's (RBI) preferred range of 60-80%. Banks are lending out a large part of their deposits, a trend that has been growing and previously hit a 20-year high of 80% in December 2023.
Funding Pressures and Squeezed Profits
This ongoing gap between loan and deposit growth puts pressure on bank profits and cash flow. Because deposits are not keeping pace with lending, banks are forced to use more expensive funding from the wholesale market. This is made worse by a drop in low-cost Current Account Savings Account (CASA) deposits, which are now around 37.5%, down from about 40%. As a result, Net Interest Margins (NIMs), a key measure of bank profitability, are suffering. Reports show NIMs have already fallen to 3.1% for fiscal year 2025 from 3.3% in 2024, ending a previous rise. Private banks, which usually lend out more relative to their deposits, are especially at risk and facing tougher competition for deposits.
Economic Outlook and Sector Prospects
Despite these internal challenges, India's overall economy offers some backing for continued loan growth. The economy is expected to grow strongly, with forecasts around 6.9% for the year, and has seen average growth of 9-12% since 2021, driving loan demand. Inflation is trending upwards to an estimated 3.8% by April 2026, but it's still within the RBI's 4% target. The central bank is keeping its monetary policy neutral. Analysts expect credit growth to stay healthy, though it may slow down, with predictions of 11-13% for the rest of 2026. This forecast is more optimistic than global credit growth projections. However, the sector faces limits on supply as the liquidity environment tightens.
Risks of Rapid Credit Growth
The high C/D ratio and the growing gap between loans and deposits carry considerable risks. Historically, fast credit expansion has often led to financial instability, with credit booms sometimes followed by worsening loan quality. Credit risk is rising, especially in areas like unsecured personal loans and the Micro, Small, and Medium Enterprises (MSME) sector, with new Non-Performing Assets (NPAs) expected to increase. If the C/D ratio goes above 85%, the RBI might step in with broad policy measures. Additionally, customer habits are changing, with more people moving money from savings accounts to investment options, which affects how much banks can gather in deposits. The time of easily available, cheap CASA deposits seems to be over, requiring banks to rethink their core deposit-gathering strategies.
Outlook for Banks
Experts expect the C/D ratio to gradually return to normal levels, possibly around 79-80% by March 2027. This means banks will continue to face strong competition for deposits, making their ability to attract funds a key advantage. While the banking sector is heading for slower growth, its strength will be tested by how well it manages its cash, funding costs, and changing credit risks in a changing economic and regulatory landscape.