Loan growth outpaces deposits—will banks be compelled to hike FD rates?

When deposits grow slower than loans over a prolonged period, it could lead to liquidity and asset-liability mismatch challenges for lenders. Given that banks rely on deposits for cheap funds, this widening gap would push them towards other sources. Customers might benefit, though. When deposits are scarce, banks tend to raise deposit rates to attract funds.

For the broader banking system, credit growth was at 10.4% as on 19 September, per Reserve Bank of India’s data analyzed by Care Ratings. Deposits rose 9.5% from a year ago in the same period. In a report on 6 October, Care Ratings attributed the slower growth to a likely decline in bulk deposits. As a result, the credit-deposit (CD) ratio rose to 80.3%, crossing the 80% mark for the first time in six months.

The provisional loan and deposit numbers cited earlier are detailed by banks at the end of every quarter. Among top banks, the country’s largest lender State Bank of India and private sector majors ICICI Bank and Axis Bank do not give their provisional updates. The Q2 earnings announcements for the sector will be kicked off with Bank of Maharashtra on Tuesday. Among large banks, Axis Bank will be the first to declare its financials on Wednesday.

The banking industry has been facing a deposit crunch, with loan growth outpacing deposit growth. The first half of calendar 2025 saw deposits largely growing in line with loans due to slower credit offtake.

As such, in Q2, the quarter ended September, both loan and deposit growth showed a healthy momentum across public, private and small finance banks. However, advances grew faster than deposits for most major banks, leading to deposit growth falling behind, banks’ provisional numbers show.

Loans see traction

Private sector banks led the expansion in credit in Q2, with advances growing 11-16% year-on-year (y-o-y). Among major banks, Kotak Mahindra Bank and Bank of Maharashtra were the fastest growing, with their loan book expanding nearly 16% and 17%, respectively. YES Bank was the outlier, posting single digit loan growth at 7%.

In Q1, large banks’ loan growth was in the range of 5-15%.

While Kotak Bank’s loan growth was above expectations, its segment-wise performance needs to be monitored, Macquarie Research said in a note last week. “In 1Q, corporate and mortgage book contributed to 80% of incremental growth, which in our view had an impact on NIMs (net interest margin),” the note said, estimating the margin around 10 basis points (bps) lower for the quarter.

On a sequential basis, banks’ loan growth was in the 3-6% range, signaling a steady pick-up in credit demand amid a good monsoon and festive season build-up. IDBI Bank was the outlier on the upper end, with its loans growing 8.7% quarter-on-quarter (q-o-q).

Credit growth is also expected to have been boosted by the bumper 50 bps rate cut by the Reserve Bank of India in June, resulting in a cumulative 100 bps cut in the policy rate since February. The central bank, in its June policy, also front-loaded a 100 bps cut in banks’ cash reserve ratio (CRR) to support banking system liquidity and spur credit growth.

Deposits lag advances

Deposit growth too picked up during the quarter, with most large banks reporting a 9-12% y-o-y rise. Kotak Bank bucked the trend at the higher end, with its deposits growing 14.6% commensurate with its higher loan growth of 15.8%. In Q1, deposits of most large banks grew at 7-10%.

Despite this pick-up, the growth in deposits lagged advances, reigniting concerns of tight liquidity for banks and strain on their credit-deposit ratio, especially ahead of the seasonally-strong demand for credit in Q3 due to big spendings during the festival season.

On a sequential basis, large banks’ deposits grew 2-5%, except for YES Bank that saw a 7.6% q-o-q jump.

HDFC Bank calibrates strategy

For HDFC Bank, the country’s largest private sector lender, the growth in deposits outpaced loans. Its Q2 advances grow 9.9% from a year ago, while deposits grew at over 12%. The bank has been consciously growing loans slower than deposits to improve its credit-deposit (CD) ratio, which took a hit following the merger of erstwhile parent HDFC Ltd with the bank.

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The CD ratio or loan-to-deposit ratio (LDR) of the bank improved from 96.5% in Q4 of FY25 to 95.1% in Q1 this fiscal year.

Macquarie Research said the deposit growth at 12% y-o-y and 1.4% q-o-q was lower than its expectations. Its deposit accretion during the September quarter was ₹37,500 crore compared with ₹1.2 trillion in the year ago period. “Accordingly, there was a 285 bps QoQ increase in LDR in Q2. Given the lower deposit mobilization ( ₹0.9 trillion in H1 FY25), there is downside risk to our deposit growth estimates of 15% YoY for FY26,” the note said, factoring in a 12-bps sequential reduction in margins in Q2.

The bank has earlier said that while its loans grew slower than the industry in FY25, they should largely align in FY26 before outpacing the sector in FY27, allowing the bank to start gaining market share from FY27.

Outside of the large banks, small finance banks showed the sharpest uptick in both credit and deposits. AU Small Finance Bank’s advances grew 22% y-o-y and deposits were up 21%, while Suryoday Small Finance Bank reported a 23% jump in loans and 35% rise in deposits.

“In a situation where loans grow faster than deposits, the cost of funds for banks go up. That’s because deposits are the cheapest source of funds for banks and in the absence of adequate deposits, banks have to look for other avenues,” said Deep Mukherjee, partner & director, Risk Management at BCG.

For an economy like India that has strong growth ambitions, a slightly higher rate of loan growth over deposit growth is not bad as it only shows that banks’ books are expanding, Mukherjee said.

“Banks need to price deposits better, keeping in view the opportunity cost of household savings. Given the financialization of savings, households have market avenues to park savings,” said Mukherjee.