Bank credit growth hits 8-quarter high of 16.5%, deposit gap widens

Bank credit growth climbed to an eight-quarter high of 16.5 per cent in the first quarter of FY27, even as deposits expanded at a slower 11.3 per cent, widening the funding gap for lenders, a CareEdge Ratings report has said.

Credit outstanding reached Rs 213.6 lakh crore as of June 30, 2026, against deposits of Rs 256.5 lakh crore. The 512-basis-point gap between the two growth rates was the widest in eight quarters and lifted the system's loan-to-deposit ratio (LDR) to a record 83.3 per cent.

The report noted that the peak came in June, a quarter in which the ratio is not seasonally elevated, suggesting the current level reflects an underlying funding gap rather than a temporary seasonal effect.

Finance-sector lending drove the expansion, with bank funding to non-banking financial companies rising 22.4 per cent to Rs 25.3 lakh crore. Elevated bond yields prompted NBFCs and large corporates to lean more on bank funding. Industry credit grew 15.5 per cent, though infrastructure construction credit contracted 1.1 per cent. Trade credit rose 18.1 per cent and personal loans 12.7 per cent, pointing to a cycle increasingly powered by working-capital and operational funding rather than fresh capacity creation.

Public sector banks expanded credit by 17.3 per cent, outpacing private banks' 14.8 per cent. Their LDR, however, rose to 79 per cent from 73.9 per cent a year earlier, trimming the headroom available within historical ranges to sustain strong credit growth.

Pressure eased temporarily after the RBI's FCNR(B) swap facility. Mobilisation touched USD 136.4 billion by August 31, including USD 127.2 billion through FCNR(B) deposits, and the credit-deposit growth gap narrowed to about 360 basis points from roughly 500 basis points. CareEdge cautioned that the inflows offer only short-term relief.

"Deposit mobilisation is now the key thing to watch," said Saurabh Bhalerao, Director, CareEdge Ratings, adding that competition for household savings is likely to persist as savers favour higher-yielding alternatives.

Funding costs could firm again once the FCNR(B) window closes, while the high LDR leaves banks with limited funding headroom. Asset quality remains a source of comfort, though geopolitical risks could weigh on credit demand and repayment capacity.