Bank lending continued to outpace deposit growth in the June quarter, widening the funding gap as banks struggle to raise deposits fast enough to support demand for loans.
Early business updates indicate that credit growth remained resilient despite headwinds from the US-Iran war, thereby increasing pressure on banks to accelerate deposit mobilisation to sustain the pace of lending, industry experts said.
Most large and mid-sized banks posted year-on-year credit growth between 12.9% and 21.3% whereas the figure was as high as 25.5-26.5% for smaller banks such as Jammu and Kashmir Bank and Dhanlaxmi Bank. Deposit growth, by contrast, for mid-sized and large banks was in a range of 7.0-14.9%, which went up to 16.8-17.1% for some smaller banks, initial business updates by lenders showed. Union Bank was the outlier, with its loans growing 12.5% year-on-year in Q1 (April-June 2026) and deposits growing significantly slower at only 3.5%
“The strong credit growth has been supported by demand from corporates, which have shifted to bank borrowings amid rise in corporate bond yields as well as elevated cost of external commercial borrowings amid higher hedging costs,” said Anil Gupta, senior-vice president and co-group head of financial sector ratings at Icra Ltd.
Growth in the retail segment, particularly in gold loans—driven in part by a surge in gold prices following rupee depreciation and higher import duties—also supported strong loan growth momentum, he added.
Higher requirements for working capital funding amid supply-side disruptions due to the US-Iran war also contributed to the rise in credit demand, according to Nirav Shah, managing director of Equirus Capital.
Bank lending stood at ₹215.5 trillion as of 15 June, up 17.7% from a year ago. In comparison, deposits stood at ₹258.4 trillion as of 15 June, up 12% year-on-year, according to the latest Reserve Bank of India (RBI) data.
FCNR(B) deposits to help
The accelerated pace of credit growth is expected to worsen banks’ deposit mobilisation challenges, as they struggle to raise deposits fast enough to keep up with lending.
Industry experts expect that the central bank’s recent window incentivising foreign currency non-resident (bank), or FCNR (B), deposits, should help ease some of the pressure on deposit growth. However, the benefit is likely to be limited in Q1 given that the scheme was announced at the beginning of June.
Karan Gupta, director and head of financial institutions ratings at India Ratings and Research, estimates that due to the relaxation in FCNR(B) deposits, banks could see inflows that could add around 1.5-2 percentage points to the “base case deposit growth forecast” of 11-11.5%. “That would bring deposit growth much closer to credit growth and provide significant relief to banks, at least over the next quarter,” he said.
However, Icra's Gupta believes that while FCNR(B) deposits will help narrow the gap between credit and deposit growth in the near term, the gap may persist as these funds get deployed and credit growth continues to outpace deposit growth.
“With mobilisation of FCNR deposits, we expect the share of CASA (current account and saving account) deposits in overall deposits to further decline, which will push up the overall cost of funds,” he said.
Normalisation in credit demand
A gradual normalisation in credit demand, as supply-side pressures ease and bond market borrowings return to normal levels, could help narrow the credit-deposit gap, analysts said.
Retail credit growth, which accounts for about a third of overall bank lending, could see “some cooling” if the monsoon sees a shortfall and rural borrowing normalises, according to India Ratings' Gupta.
“Banking system credit growth for FY27 should settle at around 13%, even though Q1 provisional numbers have come in stronger. The current momentum is likely to moderate as some of the factors supporting credit growth in the first quarter ease,” he said.
Lower incremental demand from oil-marketing companies, which have seen higher working capital requirements due to the spike in crude oil prices during the quarter, should help, according to Gupta. Also, bank borrowings by non-bank lenders are likely to ease and shift back to the bond market as yields have cooled off.
Moderation of even 1-1.5 percentage points in retail growth would have a meaningful impact on overall system credit growth, he added.
Yields on five-year AAA-rated corporate bonds - deemed safest with the lowest default risk - have softened to 7.40–7.43% from around 8.00% in late May, when geopolitical tensions had pushed them higher, according to the latest RBI data.
Yields on one- and three-year AAA bonds have also eased by 34 and 24 basis points (bps) to 7.54% and 7.52%, respectively. One basis point is one-hundredth of a percentage point.
As a result, several Indian companies and non-banking financial companies (NBFCs) such as Bajaj Finance, Cholamandalam Investment & Finance Co, National Bank for Agriculture and Rural Development tapped the corporate bond market in June, Mint reported on 1 July.
Still, overall credit growth is expected to remain robust, even if some borrowing by corporates and non-bank lenders shifts from banks to bond markets or external commercial borrowings (ECBs). Loan demand from the retail segment and MSMEs, supported by credit guarantee schemes, will continue to drive credit growth, Icra's Gupta said.