Indian banks have reached a critical milestone as the credit-to-deposit ratio hit an all-time high of 81.75% as of December 31, signaling unprecedented pressure on deposit mobilization amid robust loan demand. This elevated ratio reflects challenges in attracting deposits, with investors seeking higher returns elsewhere, and a significant lag in deposit growth compared to credit expansion. According to The Economic Times, this record ratio underscores the persistent strain on banks' liquidity buffers as loan portfolios expand faster than deposit bases, creating a fundamental mismatch between funding availability and lending requirements.
Banks are confronting mounting liquidity pressures as loan portfolios expand faster than deposit bases. According to The Economic Times, liquidity coverage ratios (LCR) across banks declined in the third quarter as strong credit growth outpaced deposit accretion. While short-term borrowing rates remained subdued due to a largely surplus system liquidity, the record-high credit-deposit ratio at 82% underscores the persistent strain on banks' liquidity buffers amid robust loan demand. As reported by The Economic Times, the sharpest decline was seen at State Bank of India, where credit expanded by 15% in Q3FY26, while deposits grew a more modest 9%. Consequently, the bank's liquidity coverage ratio fell to 125% Q3 from 144% in Q2, reflecting the widening gap between loan growth and deposit mobilisation.
Banking system liquidity has remained in a daily average surplus of ₹2.56 lakh crore in February so far, easing short-term funding conditions and bringing down overnight and money-market borrowing rates. However, as reported by The Economic Times, despite banks holding surplus liquidity, this has not translated into an improvement in liquidity coverage ratios. According to Alok Singh, head of treasury at CSB Bank, "Banks are sitting on cash which they have through open market operations, but cash in the form of deposits is absent and the credit-deposit ratio is not improving. We do get deposits from mutual funds, but that is of a different colour. The run-off factor on deposits of financial institutions is more, which hurts LCR. Retail deposits help the LCR." As of February 13, bank credit grew 14.6% year on year while deposits grew 12.5%, latest RBI data showed. The run-off factor on deposits of financial institutions is more, which hurts LCR, while retail deposits help the LCR.
With deposit mobilisation remaining weak, banks have increasingly turned to certificates of deposit (CDs) to shore up funding. As reported by The Economic Times, CD rates as of February 15 stood at 7.37%, versus 6.70% a month ago, RBI data showed. A senior PSU banker noted that "Maturities of CDs this quarter are very high, which has left banks scrambling for funds and thus has increased CD rates. The LCR is also around the lower limits of the board approved range for many banks." The reliance on CDs has kept CD rates elevated, even as system-wide liquidity remains in surplus, market experts said. Proceeds from these issuances can be deployed into high-quality liquid assets, providing partial support to liquidity buffers.
The persistent strain on banks' liquidity buffers highlights the challenge of matching robust credit demand with adequate deposit mobilisation. According to The Economic Times, with banks holding surplus liquidity, the focus shifts to improving deposit mobilisation strategies. The current situation reflects broader market dynamics where banks are sitting on cash from open market operations but struggling to convert this into retail deposits, creating a mismatch between liquidity availability and actual funding requirements for lending operations. The record credit-deposit ratio of 81.75% underscores the urgency for banks to address this funding gap through enhanced deposit mobilisation initiatives, even as system-wide liquidity conditions remain favorable.