Indian banks are experiencing a structural shift as term deposits reach 61% of total deposits in FY26, up from 58% in FY19. Customers are increasingly favoring higher-yield instruments, driving down CASA ratios and creating pressure on bank funding costs. This shift makes it harder for lenders to lower loan rates while maintaining profit margins.
What Happened
India's banking sector is witnessing a notable shift in how customers keep their money. According to a report by Crisil, term deposits—often known as fixed deposits—now make up 61% of total bank deposits in fiscal year 2026. This is a clear rise from the 58% share observed in fiscal year 2019.
Conversely, the share of money held in current accounts and savings accounts (CASA) has dropped to 39%, down from 42% seven years ago. CASA is considered a cheaper source of funding for banks because these accounts typically pay very low interest. When the share of CASA falls, banks must rely more on higher-interest term deposits to fund their lending business.
Why The Shift Matters For Bank Margins
For a bank, the cost of funds is a major driver of profit. When customers move money from low-interest savings accounts into higher-interest term deposits, the bank’s interest expense increases. If a bank cannot pass these higher costs on to its borrowers by charging higher interest rates on loans, its net interest margin (NIM)—which is the difference between what a bank earns on loans and what it pays on deposits—comes under pressure.
This shift effectively limits a bank’s ability to operate with a lower cost base. In the current environment, the trend suggests that banks are having to work harder and pay more to attract and retain deposits, as retail customers look for better returns on their savings.
Private Banks Versus Public Sector Banks
The impact of this change is not uniform across the industry. Private sector banks have seen a sharper decline in their CASA ratios, which fell to 38% in FY26 from 42% in FY19. Public sector banks experienced a relatively more stable performance, with their CASA ratio dipping from 41% to 39% over the same period.
Part of this disparity in the private sector is attributed to structural changes, such as the major merger between HDFC Ltd and HDFC Bank in fiscal year 2024, which altered the liability profile of the merged entity and impacted the industry average.
The Repo Rate And Deposit Rate Gap
The difficulty in managing deposit costs is also visible in how banks respond to changes in the central bank’s policy rates. Between February 2025 and March 2026, the repo rate saw a cumulative reduction of 125 basis points. However, banks only lowered their rates on fresh term deposits by roughly 48 basis points. This gap indicates that banks are prioritizing deposit growth and stability over immediate rate cuts, likely to remain competitive for savings that are increasingly flowing toward other financial avenues like mutual funds and equities.
What Investors Should Monitor
Investors tracking bank performance may want to look beyond headline loan growth figures. The key monitorable for the coming quarters will be the movement in cost of funds and NIMs.
- Margin Stability: Observe whether banks can maintain their margins despite the rising cost of deposits.
- Liability Mix: Check for management commentary on their strategy to improve the CASA ratio or manage the growth of higher-cost term deposits.
- Asset-Liability Management: Pay attention to whether banks are successfully passing on costs or if their profitability is absorbing the pressure of high interest rates on deposits.