Banks Seek Expensive Funding as Credit Growth Surpasses Deposits
With credit growth in India reaching 14.5%, significantly outpacing deposit growth at 11.9% as of February 28, banks are increasingly turning to certificates of deposit (CDs) to bridge the widening gap between asset creation and liability mobilization. This shift has resulted in CDs accounting for 2.6% of total deposits, the highest level in a decade. The Indian banking sector is currently facing a structural imbalance that is prompting lenders to adjust their balance sheet strategies to manage the funding shortfall effectively.
Rising Reliance on Certificates of Deposit
The Indian banking system is experiencing a notable shift as the reliance on certificates of deposit has surged. With a year-on-year growth of 29%, the use of CDs has become a crucial component of banks’ funding strategies. This increase reflects a significant change in how banks are managing their liquidity, particularly as core deposit growth has not kept pace with the rising demand for credit. The share of CDs in total resource mobilization has not been this high since 2016, indicating a trend that warrants careful observation. According to Sachin Sachdeva, vice president and sector head of financial sector ratings at ICRA, while the current reliance on CDs aids in short-term liquidity management, it raises concerns regarding asset-liability management and funding costs.
Credit-Deposit Ratio Near Historic Highs
The gap between credit and deposit growth has remained substantial, fluctuating between 150 and 300 basis points. This disparity has pushed the systemic credit-deposit ratio above 82%, nearing historic highs. Over the past decade, credit and deposit growth had generally moved in tandem, averaging between 10% and 12%. However, the current divergence is striking, especially when compared to the pandemic years when deposit growth outpaced credit demand by over 400 basis points due to heightened risk aversion and government fiscal support. The current situation marks a significant shift from the past, highlighting the challenges banks face in maintaining a balanced growth trajectory.
Shifts in Investment Strategies
In response to the changing dynamics of credit and deposit growth, banks are reallocating their capital away from government securities to sustain credit expansion. As of February 2026, the investment-to-deposit ratio has decreased to 27.6%, down from the decadal average of 29% to 30%. This decline indicates that banks are reducing their surplus statutory liquidity ratio holdings and moving closer to regulatory minimums to support loan growth. The total investments in government securities remain substantial, at approximately Rs 69.5 lakh crore, but the shift in strategy reflects the urgent need for banks to adapt to the current credit landscape.
Changing Household Savings Patterns
The slowdown in deposit growth is also indicative of broader structural changes in household savings behavior. There has been a noticeable shift in flows towards mutual funds, equities, and other market-linked instruments, which has contributed to the decline in traditional deposit growth. Despite this, credit demand remains robust across various sectors, including retail, micro, small, and medium enterprises (MSMEs), and corporate segments. This strong demand for credit underscores the necessity for banks to innovate and adapt their funding strategies to meet the evolving needs of borrowers while navigating the challenges posed by changing deposit patterns.
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