Banks vie for deposits to keep up with credit growth: EAC-PM paper

The credit-deposit growth gap widened to 5 per cent in July, prompting banks to rely more on certificates of deposit, money markets and domestic and overseas bonds

Indian banks will need to step up mobilisation of stable deposits as credit growth continues to outpace deposit growth, pushing up their cost of funds and increasing reliance on alternative sources of funding, according to an Economic Advisory Council to the Prime Minister (EAC-PM) working paper. 

The gap between credit and deposit growth widened to 5 percentage points in July 2026, with credit growth at 19.3 per cent and deposit growth at 15.4 per cent, the paper said. This has prompted banks to rely more on certificates of deposit, money markets, including TREPS, and domestic and overseas bonds to meet credit demand. 

 

“Going forward, the agenda for banks to mobilise stable deposits to support credit expansion” should also include avoiding excessive concentration in unsecured retail or rapidly growing segments, the paper said. It recommended deeper lending to micro, small and medium enterprises (MSMEs), infrastructure and green investment, along with improved climate-risk assessment.

Banks also need to strengthen board governance, talent, customer grievance redressal and cyber defence, it said.

The credit-deposit gap has widened since 2022-23 (FY23).  

In FY26, credit growth stood at 16.1 per cent against deposit growth of 13.5 per cent. The wedge subsequently widened further, pushing loan-to-deposit ratios above 82 per cent, according to the paper. However, increased accretion to FCNR(B) deposits following Reserve Bank of India measures to bolster capital inflows could help narrow the gap later in the current financial year.

The study, which examined 47 banks covering more than 95 per cent of the banking system’s assets over FY15-FY26, said banking reforms had significantly improved efficiency and balance-sheet health. Mean technical efficiency improved from 77.99 per cent in FY20 to 88.34 per cent in FY26. 

Public-sector banks recorded technical efficiency of 93.12 per cent in FY26, compared with 86.02 per cent for private banks.

The gross non-performing asset ratio fell to 1.68 per cent in June 2026 from 11.5 per cent in March 2018, while aggregate CRAR stood at 17.78 per cent and liquidity coverage ratio at 126.94 per cent. 

The paper also sees artificial intelligence and machine learning driving the next phase of banking productivity. “The new breed of Artificial Intelligence and Machine Learning will beget more innovations for banks,” it said.