Whalesbook
Record Funding Gap Emerges as Credit Outpaces Deposits
India's banking sector is facing a significant funding gap as credit growth consistently outpaces deposit collection. By March 15, annual deposit growth hit a subdued 10.8%, sharply trailing the 13.8% rise in advances. This imbalance has pushed the credit-deposit (CD) ratio to a record 83.04%. The gap has widened significantly in recent weeks, signaling a structural shift in how banks fund their lending. To meet loan demand, banks are increasingly turning to more expensive wholesale funding sources, like Certificates of Deposit (CDs). These have surged 29% year-on-year, now making up 2.6% of total deposits – the highest level in ten years. This reliance on costlier funds strains the system.
Liquidity Squeeze and Profitability Worries Grow
This high CD ratio creates increased liquidity risk for banks. With less buffer, they have reduced flexibility to handle unexpected cash needs or market swings. Analysts caution this situation could delay Net Interest Margin (NIM) recovery, a key measure of bank profitability. While loan growth is strong, the cost of funding is rising due to greater reliance on expensive wholesale deposits and CDs. This pressure on margins could push back NIM recovery to late FY26 or early FY27, according to some forecasts.
Global Comparison: India's High CD Ratio
Globally, credit-to-deposit ratios differ greatly. Countries like Germany and the UK often have higher ratios due to more wholesale funding. India, China, France, and the US typically maintain lower ratios, backed by strong deposit bases. While India's current record ratio is high, it's not entirely outside global norms seen in 2021 (average 86.91%). However, the speed of this increase is a significant concern, pointing to a tightening funding environment.
Geopolitical Risks and RBI Oversight
Domestic funding strains are compounded by global geopolitical instability, posing risks to the banking sector. The crisis in West Asia has caused significant foreign portfolio investor (FPI) outflows, with nearly $6 billion leaving Indian markets by mid-March. Rising crude oil prices linked to the conflict also raise concerns about India's fiscal health and inflation. These economic factors can indirectly affect deposit growth and loan demand. The Reserve Bank of India (RBI) is closely watching the CD ratio and stands ready to ensure banking stability. New Liquidity Coverage Ratio (LCR) rules set for April 1, 2026, could also shape deposit strategies, possibly benefiting banks heavily reliant on wholesale funding. While LCR updates aim for better resilience, the current high CD ratio and reliance on wholesale funds require careful management of bank assets and liabilities.
Analyst Views on Future Outlook
Analysts acknowledge the immediate pressures. Nomura warns of margin erosion from slow deposit growth. Moody's Ratings, however, maintains a stable outlook, expecting strong economic growth to support stable profitability and loan growth matching deposits in FY26-27. India Ratings and Research anticipates improved profitability and margins in FY26-27 if interest rates reverse and retail credit becomes more affordable. Ultimately, banks must attract stable, low-cost deposits to fund loan books without sacrificing margins or liquidity.