Indian banks are seeing strong 18% credit growth, but rising funding costs are straining profitability. Lenders are struggling to gather low-cost deposits, forcing a reliance on expensive bulk funding that is expected to keep profit margins under pressure throughout FY27.
Detailed Coverage
The Indian banking sector is currently navigating a distinct challenge where rapid credit growth is clashing with rising operational costs. While official data indicates that credit growth has accelerated to 18% as of late June, doubling from the 9% recorded a year ago, this expansion is not leading to a proportional increase in bank earnings. The primary engine behind this lending surge is corporate credit, reflecting a pick-up in business spending on operations and new projects, which is generally a positive sign for the broader economy.
The Impact of Deposit Costs on Margins
Even as banks record stronger loan books, their ability to grow net interest income—the difference between interest earned on loans and interest paid on deposits—is being limited. A significant structural issue is the slow growth of Current and Savings Account (CASA) deposits, which are the cheapest source of funds for banks. When banks cannot attract enough of these low-cost deposits, they are forced to turn to bulk funding. Bulk deposits come at a much higher interest cost, which directly eats into the net interest margin. Because banks are choosing to continue aggressive lending to meet corporate demand, this high-cost funding mix is expected to continue throughout the remainder of fiscal year 2027.
Regulatory Environment and Liquidity
The Reserve Bank of India (RBI) has kept a close watch on these trends while maintaining a supportive stance for the economy. Rather than signaling alarm over high loan-to-deposit ratios, the regulator has focused on liquidity management tools. Specifically, adjustments to Liquidity Coverage Ratio (LCR) norms implemented since April have provided banks with more flexibility to keep lending. This regulatory support is crucial for banks as they manage the balancing act of funding corporate expansion without significantly damaging their own profitability. Investors will likely watch whether banks can balance their deposit acquisition strategies to improve their funding mix in future quarters, as this remains the key factor for stabilizing margins. Continued monitoring of quarterly deposit growth versus credit growth will be essential to gauge if the pressure on margins begins to ease or continues as a drag on bottom-line performance.