Credit Growth Outpaces Deposit Growth

Why in news:

In recent times India's banking sector is witnessing a widening gap between credit growth and deposit mobilisation. According to RBI report, the credit-deposit gap widened to a record 564 basis points (bps) in the fortnight ended 15 June 2026, pushing the Loan-to-Deposit Ratio (LDR) to an all-time high of 83.4% and raising concerns over banking sector liquidity and stability.

Key highlights of the RBI report:

• • • Outstanding bank credit increased by 17.7% year-on-year to ₹215.5 lakh crore, driven by strong demand from retail borrowers, MSMEs, NBFCs, and corporates.
    • Bank deposits grew by only 12.0% year-on-year to ₹258.4 lakh crore and declined by ₹1.8 lakh crore (0.6%) sequentially due to advance tax outflows and increased investments in market-linked financial products.
    • The credit-deposit gap widened from 544 bps to 564 bps, indicating that lending is growing much faster than deposits.
    • As a result, the Loan-to-Deposit Ratio (LDR) increased from 79.4% a year ago to a record 83.4%, reflecting tighter liquidity conditions.

What are CASA Deposits?

CASA (Current Account and Savings Account) deposits are low-cost deposits that form the primary funding source for banks.

• • • • Current Accounts: Mainly maintained by businesses, generally do not earn interest but offer unlimited transactions.
      • Savings Accounts: Held by individuals and earn modest interest while providing high liquidity.

CASA deposits are considered low-cost and "sticky", making them a stable source of funds for banks to extend loans.

Why are CASA Deposits Slowing?

The slowdown in CASA deposits is due to:

• • • Rising investments in equity markets, mutual funds, ETFs, and small savings schemes, which offer higher returns.
    • Rapid digitisation through UPI, online investment platforms, and simplified KYC, making investing easier.
    • Increased financial awareness among households.
    • Attractive interest rates offered on Fixed Deposits (FDs) compared to savings accounts.

About Credit-to-Deposit Ratio and Asset-Liability Mismatch:

• • • The Credit-to-Deposit (CD) Ratio or Loan-to-Deposit Ratio (LDR) measures the proportion of deposits used for lending. A higher ratio indicates efficient utilisation of deposits but leaves banks with a smaller liquidity cushion.
    • An Asset-Liability Mismatch (ALM) arises when banks finance long-term loans using short-term deposits. If deposits are withdrawn before loans mature, banks may face liquidity stress.

Why is Slow Deposit Mobilisation a Concern?

Weak deposit growth has forced banks to increasingly rely on wholesale funding such as Term Deposits and Certificates of Deposit (CDs).

• • • Outstanding Certificates of Deposit reached ₹6.67 lakh crore, while fresh issuances rose sharply to ₹1.02 lakh crore, registering 38.1% annual growth.
    • Since CASA deposits typically cost 3–4%, whereas term deposits and CDs cost 7–8%, banks' Net Interest Margins (NIMs) are compressed.
    • Greater dependence on wholesale funding also increases vulnerability to RBI interest rate changes, liquidity tightening, and external financial shocks.

Term Deposits, Certificates of Deposit and Mutual Funds:

• • • Term Deposits include Fixed Deposits (FDs) and Recurring Deposits (RDs), where money is invested for a fixed period in exchange for higher returns.
    • Certificates of Deposit (CDs) are negotiable money market instruments issued by banks to mobilise short-term funds from institutional investors.
    • Mutual Funds pool investors' money into diversified portfolios managed by professionals. They offer higher return potential but are exposed to market, credit, liquidity, and interest-rate risks.

Conclusion:

improving deposit mobilisation, strengthening asset-liability management, and maintaining a balanced Credit-to-Deposit Ratio will be crucial for ensuring sustainable growth and resilience of India's banking sector.