Credit-deposit growth gap likely to dip sharply in FY26: India Ratings

The gap between credit and deposit growth in the banking system is expected to decline sharply to 80 basis points (bps) in the next financial year from an average of 386 bps over the FY22-Q3FY25 period, according to rating agency India Ratings.

This would be against the backdrop of sharp moderation in the incremental loan deposit ratio (LDR) of the Indian banking system to 85 per cent in February 2025 from 117-118 per cent in the same month of 2024.

During this period, the banking system’s loan growth fell to 11.0 per cent on a year-on-year (Y-o-Y) basis in February 2025 from 20.5 per cent, said India Ratings in a statement.

The pace of moderation was less sharp for mobilisation of liabilities compared to that observed in the case of credit.

The deposit growth declined to 10.3 per cent in February 2025 from 13.1 per cent a year ago.

In June 2024, Shaktikanta Das, then governor of Reserve Bank of India (RBI), had asked banks to rework their business plan in light of the persisting gap between credit and deposit growth rates.

He also flagged consequent challenges to manage liquidity, repricing and rollover risks.

India Ratings said the major share of LDR decrease was coming from private sector banks that even in a liquidity constrained environment reported deposit growth of 13.9 per cent Y-o-Y, and loan growth of 9.3 per cent Y-o-Y in 9MFY25, leading to incremental LDR of 63.3 per cent vs 118.5 per cent in FY24.

On the other hand, public sector banks (PSBs) have reported constrained growth in deposits at below 10 per cent Y-o-Y so far in all quarters of FY25 (Q1FY25: 8.9 per cent, Q2FY25: 9.5 per cent, Q3FY25: 9.8 per cent).

State-owned lenders reported an LDR of 98.8 per cent in 9MFY25 vs 103 per cent in FY24, the rating agency said.

With the improvement in system credit growth in FY22-FY23, most PSBs had an average LDR of about 65 per cent, significantly lower than private banks at 82-83 per cent.

Thus, PSBs could drive significant loan growth and profitability without the need to grow deposits commensurately.

However, with most PSBs operating at the higher end of their normal LDR range (around 75 per cent), they will have to start focusing on growing deposits to meet the strong systemic loan growth, it added.