In a significant shift for India's banking sector, financial institutions lent out more money than they collected in fresh deposits during 2025. This imbalance has sent a key financial metric, the incremental credit-deposit (CD) ratio, soaring to 102%, up sharply from 79% recorded a year earlier, according to recent data.
The Funding Conundrum: Loans Outrun Deposits
The core issue stems from a divergence in growth rates. As of mid-December 2025, credit offtake grew at a robust pace of approximately 11.7%. In contrast, deposit growth lagged significantly behind at under 10%. This gap has intensified pressures on banks' funding costs, bond markets, and the overall transmission of monetary policy set by the Reserve Bank of India (RBI).
A CD ratio exceeding 100% clearly indicates that banks are deploying more funds in fresh loans than the amount they are mobilising through new deposits in the same period. This scenario is forcing lenders to explore alternative avenues to raise money for their lending activities.
How Banks Are Bridging the Gap
To manage this shortfall, banks are increasingly leaning on several strategies. Senior bank executives, speaking anonymously, confirmed that institutions are relying more heavily on market borrowings. They are also liquidating excess holdings of government securities held to meet the Statutory Liquidity Ratio (SLR) and dipping into balance-sheet buffers.
Prakash Agarwal, a partner at Gefion Capital, highlighted the competitive struggle. He noted that weak deposit growth is compelling banks to aggressively compete for funds. A paradox has emerged: despite the RBI cutting policy rates, banks find themselves unable to lower deposit rates for fear of further eroding inflows. This, in turn, restricts their capacity to reduce lending rates, except for those loans linked directly to external benchmarks.
RBI data underscores the stickiness of deposit rates. The weighted average domestic term deposit rate inched up to 5.59% in November 2025, compared to 5.57% a month prior, though it remains below the 6.47% seen a year ago.
Analysts See Persistent Pressure and Market Impact
Analysts expect this trend to continue. Motilal Oswal Financial Services, in a report dated January 2, projected system credit growth to remain above 12% year-on-year in FY26, potentially rising to 13% in FY27. However, competitive pressure for deposits is unlikely to ease, with deposit growth forecast to stay steady at 10% annually in FY26.
As deposits lag, banks are turning to instruments like Certificates of Deposit (CDs). Agarwal warned that this shift raises short-term funding costs and keeps broader market rates elevated. Brokerage firm Elara Securities echoed caution, expressing concern over weaker deposit flows and very high incremental CD ratios, which could pressure banks' Net Interest Margins (NIMs) going forward.
The situation has a direct link to the government bond market. A senior private sector bank official explained, "If the CD ratio is going up, it means the credit growth is coming from selling of government securities from the excess SLR being held." Banks' SLR holdings stood at 26.2% at the end of November, well above the mandatory 18% requirement. The liquidation of this excess stock to fund loans continues to exert upward pressure on government security (G-sec) yields.
This pressure is visible; the yield on the 10-year benchmark government bond is currently at 6.61%, which is 11 basis points higher than its level before the RBI's 25 basis point repo rate cut last month.
A Contrarian Perspective on the CD Ratio
Some banking experts urge a nuanced view. Neeraj Gambhir, Executive Director at Axis Bank, cautioned against reading too much into the CD ratio in isolation. He pointed out that modern bank liquidity management has moved towards Basel-III norms like the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
Gambhir argued that a rising CD ratio also reflects the "higher institutionalization of deposits" and the interplay with LCR rules, as retail savers diversify into other financial instruments beyond traditional bank deposits. He noted that if banks can raise resources through routes other than deposits, the CD ratio will naturally rise as those funds are used for lending, compensating for slower deposit growth.
The overarching message from the sector is clear: until deposit growth accelerates meaningfully, banks will have to navigate a challenging environment of higher funding costs and continued reliance on market mechanisms to support credit demand in a growing economy.
