The banking sector’s incremental loan-to-deposit ratio (LDR) on a three-month rolling basis reached nearly 126% as of February 7, 2025. The incremental LDR stands at 103% so far this fiscal year, pointing to the persisting weakness in deposit mobilisation despite more circumspect advances toward unsecured loans and non-bank financing.
As of February 7, credit climbed 11.3% year-on-year, while deposits saw a more modest increase of 10.6%.
An analysis by India Ratings highlights that deposits have consistently trailed the banking system’s credit growth since FY22, with an average gap of 416 basis points. This disparity has pushed system-wide LD₹higher, reaching 80.4% in the first half of the current fiscal year. “With the system LDR reaching its highest point in the past five years at 80%, the reliance on alternative funding sources, such as infrastructure bonds, is expected to persist,” the agency noted. “The competition for bulk deposits is likely to intensify if granular deposit growth continues to remain subdued.”
A rising LDR indicates that banks are increasingly relying on borrowed funds or other means to fund their credit growth rather than deposits, which could limit their lending capacity in the medium term.
Scramble for Deposits
According to industry analysts, the outlook for system deposit growth in FY26 is expected to be in the range of 12%-13%, similar to the projected growth for FY25. However, this growth is likely to be accompanied by high competitive intensity, especially for low-cost current account savings account (CASA) deposits.
A report by Motilal Oswal Securities underscores the competitive pressures banks are facing. It notes that many banks are focusing on enhancing their CD ratios, leading to heightened competition for deposits. At the same time, public sector banks (PSBs) are also becoming more competitive, further intensifying the battle for depositors’ funds.
“One of the key challenges faced by banks is CASA accretion, which remains difficult due to the increasing preference among depositors to lock in their funds at higher term deposit rates,” the brokerage house noted. “Deposit growth will continue to follow a narrow range of 10%-13% over the next 18 months. Banks will need to focus on improving their deposit mix by enhancing their CASA ratios and seeking alternative deposit structures that offer better cost efficiency.”
