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.
Source: The Economic Times
