Indian Banks Struggle to Boost Deposit Growth Amid Rising Loan Demand

Loan Growth Outpacing Deposit Growth

• Banks are lending more than they are accumulating in deposits, leading to a rising Loan-to-Deposit Ratio (LDR).
• As of February 7, 2025, the incremental LDR (rolling 3-month basis) hit 126%, meaning banks are loaning out ₹126 for every ₹100 in fresh deposits.
• Overall, fiscal year LDR stands at 103%, signaling a persistent weakness in deposit mobilization.

Trends & Statistics

Loan & Deposit Growth

• Credit growth (YoY): 11.3%
• Deposit growth (YoY): 10.6%
• Since FY22, deposit growth has consistently lagged behind loan growth by an average gap of 416 basis points (bps).

System-wide LDR

• Reached 80.4% in the first half of FY25, the highest in the past five years.
• This has led to increased reliance on alternative funding sources, such as infrastructure bonds and bulk deposits.

Challenges Facing Banks

CASA (Current Account Savings Account) Struggles

• Customers prefer locking funds in high-interest term deposits, reducing CASA growth.
• Banks need to attract more CASA deposits, which provide a cheaper source of funds than fixed deposits (FDs).

Competition for Deposits

• Public Sector Banks (PSBs) are becoming more aggressive in deposit mobilization, intensifying competition.
• A high deposit growth rate (12-13%) is expected in FY26, but at the cost of increased competition and higher interest payouts.

Alternative Funding Pressure

• Banks rely more on bonds and market borrowings as deposit growth remains sluggish.
• Higher borrowing costs could reduce banks’ profit margins in the long run.

Implications for the Banking Sector

Risk of Funding Shortfalls:

• If deposit growth remains weak, banks may face constraints in future lending.
• Higher reliance on non-deposit funding sources could lead to liquidity mismatches.

Higher Borrowing Costs:

• Banks may increase deposit rates to attract funds, affecting net interest margins (NIMs).
• More funds locked in term deposits could make the banking system less flexible.

Regulatory & Policy Considerations:

• The Reserve Bank of India (RBI) may intervene if LDR continues to rise unchecked.
• More incentives for CASA growth could be introduced to encourage stable deposit flows.

Future Outlook & Possible Solutions

Deposit Growth Expected at 12-13% in FY26:

• Similar to FY25, but will require intensive efforts from banks.

Strategies for Banks:

• Enhance CASA Ratios through innovative savings and current account products.
• Offer attractive term deposit rates while balancing interest costs.
• Explore alternative deposit structures (e.g., sweep-in accounts, retail bonds).

Regulatory Measures Could Be Introduced:

• RBI may consider policy actions to ensure liquidity stability.
• A balance between credit expansion and sustainable deposit growth will be crucial.