India's banking sector is staring at a funding sustainability crisis. The system's loan-to-deposit ratio has hit 82.7%—the highest in over a decade—driven by a 5.4% gap between credit growth and deposit mobilization. This isn't just a number. It's a structural shift that's forcing banks to make uncomfortable choices between growth and stability.
The April-June quarter laid bare the problem. Credit demand surged unexpectedly for what's typically a lean season, driven by three factors: the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, extended working capital cycles from supply chain disruptions, and increased borrowing by oil companies. Deposits simply couldn't keep up.
Central Bank of India reported the most aggressive expansion—advances jumped 28.8% year-on-year to ₹3.55 lakh crore, while deposits grew just 11.7% to ₹4.79 lakh crore. That's more than double the loan growth compared to deposit growth. Tamilnad Mercantile Bank wasn't far behind, with advances surging 27% against 19.7% deposit growth.
Compare this to the more measured expansion at Bank of India (18.6% advances, 14.9% deposits) and Canara Bank (18% advances, 11.7% deposits). The divergence isn't random—it reflects strategic choices about risk, growth, and funding sustainability.
Central Bank's explosive growth came from a deliberate pivot toward RAM segments—Retail, Agriculture, and MSME—which grew at 15.71%. The bank also leveraged its co-lending platform, generating ₹2,000 crore per quarter. But funding this growth required tapping alternative sources, including ₹4,628 crore in Certificates of Deposit. The bank maintains a healthy Liquidity Coverage Ratio of 210%, but the credit-deposit gap is widening faster than peers. InvestorPresentations +1
Three structural factors converged to create this credit surge.
First, the government launched ECLGS 5.0 in May 2026 with a ₹2.5 lakh crore allocation to help businesses tide over liquidity mismatches from the West Asia crisis. The scheme offered 100% guarantee coverage for MSMEs and 90% for non-MSMEs, effectively underwriting risk that banks might otherwise avoid.
Second, the Strait of Hormuz blockade in March 2026 disrupted global oil supplies, pushing 20 million barrels per day off the market and crude prices past $120 per barrel. Indian companies faced longer working capital cycles as supply chains restructured. Maritime insurance premiums jumped 50%. Businesses needed more working capital just to maintain operations.
Third, the government's decision not to fully pass through higher crude prices to consumers created a peculiar problem. Oil Marketing Companies were reportedly losing ₹100 per litre on diesel and ₹20 per litre on petrol before a partial ₹3 per litre correction. These under-recoveries forced oil companies to borrow heavily to bridge the gap between costs and regulated prices.
The response to this funding pressure has split the banking sector along ownership lines.
Private lenders like RBL Bank are actively shedding expensive bulk deposits. RBL reported a 10.2% quarter-on-quarter deposit decline, but this wasn't an outflow—it was a strategic decision. The bank allowed high-cost wholesale deposits to mature following Emirates NBD's preferential investment, choosing to prioritize margin improvement over balance sheet size. RBL's advances grew 21% to ₹1.17 lakh crore against 11% deposit growth, a deliberate trade-off.
IDBI Bank experienced a different kind of decline—a 6.3% sequential drop driven by a 20% fall in current deposits and 7% decline in bulk deposits. This reflected operational challenges rather than strategic choice.
Public sector banks are taking a different path. Canara Bank and Bank of India maintained relatively balanced growth in both credit and deposits. They're not aggressively shedding bulk deposits—instead, they're gradually reducing dependency while maintaining market presence. Bank of Baroda reported a 0.9% sequential decline in both global deposits and advances, but management emphasized this was temporary liquidity management rather than structural weakness.
The data shows public sector banks are steadily losing ground.
The reasons are structural. PSU banks face sticky deposit rates despite RBI rate cuts, government current account erosion (SBI saw a 21% decline), and intensifying competition from private banks with superior digital capabilities. Canara Bank's management acknowledged being "very conscious on pricing" due to competitive pressures, while noting geographic challenges—62-65% of their branches are in South India where "people don't place on deposits." Transcripts
Private banks hold distinct advantages in technology adoption. HDFC Bank processes 97% of payments and service transactions digitally, while Axis Bank reports 98% digital transactions and 69% of new savings accounts acquired digitally. This digital prowess translates into better customer acquisition and retention, particularly among younger demographics and urban customers. Transcripts +1
The widening funding gap is hitting profitability. Banks are facing a structural shift from low-cost CASA deposits to higher-priced time deposits. HDFC Bank reported time deposit growth of 15.5% versus total deposit growth of 14.4%, indicating customers are moving into higher-priced funding instruments. Transcripts
Management commentary across the sector reveals concern about deposit cost stickiness.
HDFC Bank observed "stiffness in the rates" with no time deposit rate changes for at least four months. Transcripts +1
For high-growth banks like Central Bank and Tamilnad Mercantile, the pressure is acute. Central Bank maintains a Net Interest Margin of 3.07%—above its 3% guidance—but sustaining this will require either faster deposit mobilization or continued reliance on higher-cost wholesale funding. Tamilnad Mercantile Bank achieved a higher NIM of 4.18% but acknowledged that maintaining current levels would be challenging due to repricing pressures. InvestorPresentations +2
Banks are facing an uncomfortable trade-off. Aggressive loan growth captures market share and drives revenue, but it strains liquidity and increases funding costs. Conservative liquidity management preserves stability but cedes competitive ground.
The industry's healthy loan-to-deposit ratio is typically considered 80-90%. At 82.7%, the system is approaching the upper end of this range. Banks operating above 90% face increased liquidity risk, while those below 80% may be underutilizing their lending capacity.
Central Bank of India maintains a credit-deposit ratio of 73.80%, providing room for expansion. Tamilnad Mercantile Bank operates at a higher 86.50%, reflecting its more aggressive growth strategy. Both banks have strong liquidity coverage ratios—Central Bank at 210% and TMB at 134%—but the trajectory matters more than current levels. Transcripts +2
The credit-deposit gap isn't closing anytime soon.
Banks that successfully navigate this environment will be those that can mobilize granular retail deposits, maintain healthy CASA ratios, and optimize their funding mix. Private banks appear better positioned on technology and customer relationship management, while PSU banks leverage their extensive branch networks and government relationships.
The ECLGS 5.0 scheme will eventually wind down, and working capital cycles should normalize as supply chain disruptions ease. But the structural shift in deposit preferences—from low-cost CASA to higher-priced term deposits—may persist. This means margin pressure could become the new normal, forcing banks to find efficiency gains elsewhere.
For investors, the key is to differentiate between banks growing sustainably and those chasing market share at the expense of funding stability. The current divergence in strategies suggests we're approaching a inflection point where the winners and losers of this funding cycle will become clear.
