The widening credit-deposit gap

Satish Singh

India’s banking system is seeing notable credit growth, with the Reserve Bank of India reporting an 18.6% year-on-year increase in bank credit by June 30, 2026, up from 9.5% the previous year. Deposit growth rose from 10.1% to 13.3%, but the gap between credit and deposit growth widened to 5.3 percentage points, creating funding challenges for banks. In the first quarter of 2026-27, bank credit increased by about 5.6 lakh crore, while deposits rose by 3.09 lakh crore. Financial resources to the commercial sector from April to May reached 2.82 lakh crore, nearly eight times the previous year, reflecting strong demand for funds. Industry and personal loans accounted for 75% of the incremental credit growth, driven mainly by infrastructure sectors like power and chemicals. Recent regulatory measures by the RBI limited unsecured personal lending and emphasised loans to industry. Gold loans significantly contributed to personal loan growth, while long-term housing loans declined due to changes in in come-tax regime, leading to a shift towards NBFCs. Even as credit expands, the structure of bank deposits is undergoing three significant changes. The first relates to their geographical distribution.

Traditional deposit markets in metropolitan and large urban centres appear to be approaching saturation. Rural and semi-urban regions, by contrast, are emerging as important sources of fresh deposits. Of the approximately 58 crore accounts opened under the Pradhan Mantri Jan-Dhan Yojana, nearly 45 crore are maintained at rural and semi-urban bank branches. The expansion of banking infrastructure, improvement in rural incomes and direct transfer of government benefits have brought a larger part of household savings into the formal financial system. Women-centric welfare programmes implemented by the Union and state governments have reinforced this trend.

Expenditure on various women’s welfare schemes during 2025-26 was estimated at nearly 4 lakh crore. This included around 1.7 lakh crore transferred by states as income support to women. Deposit mobilisation is no longer determined only by interest rates or the concentration of high-income households in large cities. Public policy, financial inclusion, women’s access to bank accounts and the formalisation of rural incomes are increasingly shaping the geography of deposits. Households are diversifying their savings, with a gradual decline in their share of bank deposits as they move towards mutual funds, equities, and other market-linked assets for better returns. The ratio of investments in these instruments rose from around 1% in 2019-20 to 6% in 2025-26, indicating a shift in savings allocation rather than a decrease in household savings. Meanwhile, the share of financial institutions in bank deposits rose by 2.6 percentage points from 2021-22 to 2025-26, while non-financial entities increased by 1.5 percentage points. External supply shocks, such as rising crude oil prices, have also impacted the divergence between credit and deposit growth. Increased business financing needs due to higher production costs have resulted in a faster rise in working capital facilities. Conversely, persistent food inflation limits household savings by reducing disposable income, creating a complex relationship between credit demand and deposit mobilisation.

Historical trends show such shocks can raise credit growth while stifling deposits, as seen in 2004-05 when oil prices surged dramatically. Indian banks are currently in a strong position, with sufficient capital, comfortable capital adequacy ratios, and low non-performing assets. Rising consumption and renewed capital expenditure are expected to boost credit growth. However, sustained credit growth requires an increase in deposits or stable funding sources. Ongoing geopolitical risks may necessitate a more proactive approach to liquidity management and deposit pricing. While FCNR(B) deposits can help, they cannot replace a stable domestic deposit base.

The writer is a senior banking and economic columnist.