India’s public sector banks reported strong Q2 credit growth between 15% and 25%, but deposits lagged significantly at 7% to 14%. This widening gap is forcing lenders to rely on costlier wholesale funding, which could impact future profit margins. Investors should monitor how banks manage deposit mobilization and funding costs in the coming quarters.
India’s public sector banks (PSBs) closed the second quarter of fiscal year 2027 with a clear trend: strong demand for loans, but a struggle to collect enough deposits. While credit growth remained robust at 15% to 25%, domestic deposit growth trailed behind at 7% to 14%. This divergence has created a widening credit-deposit gap, forcing banks to rethink their funding strategies to maintain their lending momentum.
The Challenge of the Funding Gap
When a bank lends more money than it collects in deposits, it must find other ways to fund those loans. This often involves turning to wholesale deposits or market borrowings, which are generally more expensive than the low-cost savings and current account deposits that banks prefer. For investors, this creates a potential risk to net interest margins—the difference between the interest a bank earns on loans and the interest it pays on deposits. As funding costs rise, protecting these margins becomes a difficult balancing act for bank management.
Bank-Specific Performance
Data for the quarter highlights how different lenders are navigating this environment. UCO Bank reported a 24.68% year-on-year rise in gross advances, taking its total to ₹2.88 lakh crore, while its deposits grew by a slower 14.05% to ₹3.49 lakh crore. Similarly, Punjab & Sind Bank recorded a 19.37% increase in gross advances to ₹1.26 lakh crore, with deposit growth lagging at 12.98%.
Union Bank of India also saw an 18.53% increase in its gross advances. However, the bank reported a notable credit-deposit growth gap of 1,048 basis points, reflecting the intense pressure to mobilize retail funds. Canara Bank mirrored these trends, reporting 19.4% credit growth against 13.1% deposit growth, further pushing the industry-wide loan-to-deposit ratio toward record levels, with some metrics exceeding 82%.
Strategic Focus on CASA Ratios
To counter the rising cost of funds, several banks are aggressively focusing on improving their Current Account and Savings Account (CASA) ratios. These accounts typically carry lower interest costs, making them the most efficient source of funding. Indian Bank and Union Bank of India have reported improvements in this area, which offers a cushion against the broader pressure on profit margins. Improving the CASA ratio is a primary defense against the reliance on costlier market borrowings.
For investors, the most critical monitorable in the coming quarters will be the ability of these banks to accelerate retail deposit growth. While credit demand remains healthy across industrial and personal loan segments, the sustainability of this growth depends on whether banks can secure stable, low-cost funding. If the gap between credit and deposit growth persists, it may lead to a continued reliance on expensive wholesale funding, which could squeeze profitability. Future exchange filings and management commentary on deposit mobilization will be key indicators of how effectively these banks are managing their balance sheets.