Credit-Deposit Growth Gap to Narrow in FY26: India Ratings

The gap between credit and deposit growth in India’s banking sector is expected to shrink significantly to 80 basis points (bps) in FY26, down from an average of 386 bps recorded between FY22 and Q3FY25, according to India Ratings.

Loan Deposit Ratio (LDR) to Moderate

The incremental Loan Deposit Ratio (LDR) of banks is expected to decline to 85% in February 2025, a sharp drop from 117-118% recorded in February 2024. This change comes as credit growth in the banking sector slowed to 11% year-on-year (Y-o-Y) in February 2025, compared to 20.5% a year earlier. Meanwhile, deposit growth declined at a slower pace, falling to 10.3% from 13.1% in the same period.

RBI’s Call for Business Plan Adjustments

In June 2024, former RBI Governor Shaktikanta Das urged banks to revise their business strategies due to the ongoing credit-deposit growth gap. He highlighted concerns regarding liquidity management, repricing, and rollover risks, advising banks to take corrective measures.

Private Banks Driving LDR Decline

The drop in LDR is largely driven by private sector banks, which saw deposit growth of 13.9% Y-o-Y and loan growth of 9.3% Y-o-Y in the first 9 months of FY25. This led to an incremental LDR of 63.3% in 9MFY25, down from 118.5% in FY24.

Public Sector Banks (PSBs) Facing Slower Deposit Growth

State-owned banks experienced lower deposit growth, remaining below 10% Y-o-Y in all quarters of FY25. Their LDR stood at 98.8% in 9MFY25, compared to 103% in FY24.

Future Growth Strategy for PSBs

In FY22-FY23, PSBs maintained a lower LDR (around 65%) compared to private banks (82-83%), allowing them to expand loans without matching deposit growth. However, with PSBs now operating at an LDR close to 75%, they must focus on deposit growth to sustain loan expansion and maintain profitability.

Conclusion

With credit growth moderating and PSBs nearing their LDR limits, banks must prioritise deposit mobilisation to ensure long-term financial stability and loan growth.

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