Indian Banking Sector Grapples with Widening Credit-Deposit Gap
MUMBAI: The Indian banking system is currently navigating a significant and sustained imbalance between credit expansion and deposit accretion. As of February 28, credit growth has surged to 14.5%, significantly outpacing deposit growth, which stands at 11.9%. This widening structural gap between asset creation and liability mobilisation is forcing lenders to recalibrate their balance sheet strategies to bridge the funding shortfall.
Rising Reliance on Certificates of Deposit
In response to this imbalance, banks have stepped up their reliance on certificates of deposit (CDs), with their share rising to 2.6% of total deposits. This marks the highest level in a decade, reflecting a critical shift in funding sources. Certificates of deposit are growing at an impressive rate of 29% year-on-year, highlighting the increasing use of wholesale funding as core deposits lag behind loan demand.
Throughout the year, the gap between credit and deposit growth has remained substantial, fluctuating between 150 and 300 basis points. This persistent divergence has pushed the systemic credit-deposit ratio above 82%, approaching historic highs. A decadal comparison reveals that credit and deposit growth had previously moved broadly in tandem over the past ten years, averaging between 10% and 12%. The current divergence is near the peak of the decade, while the lowest point occurred during the pandemic years when deposit growth exceeded credit demand by over 400 basis points due to risk aversion and fiscal support measures.
Expert Insights and Historical Context
According to Sachin Sachdeva, vice president and sector head for financial sector ratings at ICRA, CDs had last seen such a high share in total resource mobilisation back in 2016. He noted, "While this has supported near-term liquidity management, the increasing dependence on CDs warrants close monitoring from an asset-liability and funding cost perspective." This caution underscores the potential risks associated with heavy reliance on short-term wholesale funding.
Banks have increasingly turned to bulk and short-term wholesale markets as retail and CASA deposit growth has trailed loan demand. Outstanding CDs have risen to a record Rs 6.6 lakh crore by late February 2026, taking their ratio to aggregate deposits to around 2.6%. Over the past decade, reliance on CDs had remained subdued at approximately 1% to 1.5% of deposits, as surplus liquidity and stable deposit growth adequately supported lending activities.
Strategic Adjustments and Market Trends
To sustain credit growth, banks are also reallocating capital away from government securities. The investment-to-deposit ratio declined to 27.6% by February 2026, even as total government investments stood at around Rs 69.5 lakh crore. This marks a drop from the decadal average of 29% to 30%, which had risen to 31% to 32% during periods of weak credit demand. The current decline indicates that banks are reducing surplus statutory liquidity ratio holdings and moving closer to regulatory minimums to support loan growth.
The deposit slowdown reflects structural changes in household savings patterns, with flows shifting towards mutual funds, equities, and other market-linked instruments. At the same time, credit demand remains robust across various segments, including retail, MSME, and corporate sectors. This dual trend of changing savings behavior and strong loan appetite is reshaping the banking landscape, necessitating innovative funding strategies to maintain financial stability and growth.
