Mumbai - Public sector banks (PSBs) are increasingly using surplus liquidity already available with them and also borrowing short-term funds from the Reserve Bank of India (RBI) to support loan growth, as deposits continue to lag behind credit demand.
System-level bank credit grew 16.1% to ₹214 trillion in the financial year to 31 March (FY26) whereas deposits rose 13.5% to ₹262 trillion.
The country’s largest lender, State Bank of India (SBI), saw gross advances rise 16.9% from a year earlier to ₹49.3 trillion in FY26, whereas deposits increased 11% to ₹59.7 trillion at the end of March.
In the post-earnings press conference earlier this month, SBI chairman C.S. Setty said that while the bank would like to grow more on the deposit side, it has sufficient balance sheet liquidity to fund future loan growth, including excess statutory liquidity ratio (SLR) of about ₹3 trillion.
“If we grow around 11-12% on the deposit side, we should be good. Even 11% deposit growth gives us significant absolute growth because the base is very large. Even if 70% credit growth should be supported by the deposits…we have an excess SLR, which is a liquidity available in our balance sheet of about ₹3 lakh crore (trillion),” Setty had then said.
The RBI requires banks to maintain a certain percentage of deposits as investments in liquid assets such as gold, cash and other securities, typically referred to as the statutory liquidity ratio. Currently, the regulatory requirement for SLR is 18%, and the RBI has the option to increase it up to 40%. Most banks hold higher SLR than the minimum regulatory requirement, as it is safe, earns a steady income, and can be eaily used as a liquidity buffer when needed.
While SLR is a domestic regulatory requirement, global Basel norms also require banks to maintain Liquidity Coverage ratio (LCR), under which banks hold high-quality liquid assets equal to their expected net cash outflows over the next 30 days. Banks are required to hold 100% LCR.
In the post-earnings analyst call, the SBI chief had said that given its size, the bank prefers to hold at least 10-15% higher LCR than the 100% requirement, and that the figure was at 125% as of 31 March.
“In this quarter, again, it will move up further. If the credit growth continues, some moderation will happen in the LCR. We would be comfortable around 115-120%,” he said.
Madan Sabnavis, chief economist at Bank of Baroda, said that while deposit growth is likely to remain at 10-12%, credit growth could ease in the first half of the financial year due to subdued demand from corporates that are expected to be cautious and adopt a 'wait and watch approach' given the geopolitical situation. Given that borrowing is going to be higher only from the retail side and from MSMEs, funding gap pressures for banks might ease in the coming quarters but deposit mobilisation will continue to be a challenge.
"I don't think there's a major problem of liquidity because RBI has said they will always ensure there is sufficient liquidity. But if every quarter we see that your CD (certificate of deposit) market or bulk deposits are going up, that's a very clear indication that some banks do have a problem in terms of matching their growth and credit with deposits in a normal course," Sabnavis told Mint.
Banks’ funding requirements are typically higher in the last quarter of a financial year due to accelerated disbursements and advance tax outflows, which usually leads to elevated money market rates. Due to the higher rates on call and certificates of deposits, smaller PSBs opted to tap the central bank’s repo window to raise short-term funds amid surplus system liquidity conditions.
“We have very prudently used this window of liquidity available by RBI. So, normally also we are a borrower in that window and you get funds at 4-5%. From there, we have tried to manage our day-to-day liquidity,” Binod Kumar, managing director and chief executive officer of Indian Bank, told Mint last month.
However, analysts believe that lenders can rely on balance sheet liquidity only to a certain extent, and that unless deposit mobilisation improves, credit growth could start slowing due to liquidity constraints. This was reflected in the valuations of SBI shares, which fell over 10% after the bank declared its Q4 and FY26 financial results on 8 May.
“PSU banks have been continuously running down LCR buffers through FY26 to sustain credit growth in an environment of moderating deposit accretion,” Macquarie Research said in a note on 12 May, adding that the trend of credit growth significantly outpacing deposit growth is consistent across most state-owned lenders.
Sabnavis cautioned that even the surplus SLR balances should be looked at "a little carefully". "Normally, the SLR ratio for banks should be 24-25% so that it also covers LCR requirements. But right now only the top banks, and not all, have excess SLR. There are a number of banks, which have a liquidity deficit, and if you don't have excess SLR, which you can sell in the market, and your deposits are not there, then automatically your business will get squeezed," he said, adding that in such a scenario, banks will either have to slow down lending or lend against a much higher cost of funds.
During March 2026, rates across all three segments - call, market repo and Treps (tri-party repo) rose by 22.03 basis points (bps), 37.49 bps and 40.30 bps, respectively, compared to the previous month. The call market closed at 7.00% on 30 March, the highest level in the past six years. As a result, average trading volumes in the call and market repo segments decreased by 22.05% and 7.48%, respectively, whereas the Treps market reported a decline of 2.13%, as per data by the Clearing Corporation of India.
Call rate is the overnight rate at which banks borrow from each other without collateral. The market or interbank repo rate is the rate for short-term borrowing backed by government securities as collateral. In the Treps market, a clearing corporation acts as an intermediary and manages repo transactions between participants.
Data from the Clearing Corporation of India Ltd (CCIL) showed that average trades on its CROMS (Clearcorp Repo Order Matching System) platform, an anonymous order matching platform to facilitate dealing in market repos for government securities, rose significantly during the year. In FY26, CROMS saw 278,005 trades worth ₹454 trillion, averaging a daily transaction value of ₹1.7 trillion. In comparison, the platform had seen 232,867 trades in FY25 amounting to ₹377 trillion, with an average daily transaction value of ₹1.4 trillion.
“Loan–deposit gaps of 220–700 bps are being bridged through liquidity drawdown rather than funding strength. As excess LCR buffers normalise, PSU banks will find it increasingly difficult to sustain above-system loan growth without a recovery in deposit momentum,” Macquarie said in the note. Without structural improvement in deposit growth, which currently stands at 9-14%, public sector banks will struggle to keep gaining share at the expense of private banks, it added.