Despite resilient growth and strong banking fundamentals, India’s lenders are confronting a funding imbalance as credit expansion outpaces deposit growth, posing risks to margins and stability in the coming fiscal year.
India’s banking system enters the new fiscal year in rude health, but with an awkward imbalance beneath the surface: lending is still growing faster than deposits. That gap matters because it can leave banks more dependent on costlier, less stable funding just as the economy faces pressure from patchy rains, firmer food and fuel prices and external volatility. The Reserve Bank of India has lifted its FY27 growth forecast to 6.7 per cent, citing resilient domestic activity, while CareEdge Ratings has also pointed to strong momentum in its latest outlook. But the same strength that has supported credit demand is now exposing a funding strain that could test margins and liquidity.
On the macro side, India still looks better placed than many peers. The central bank kept its repo rate unchanged at 5.25 per cent and held a neutral stance, signalling that it wants to preserve growth even as inflation risks linger. CareEdge and other forecasters remain relatively constructive on FY27 growth, although estimates vary: CareEdge sees around 7 per cent, while S&P Global Ratings expects 6.6 per cent and Moody’s projects 6.4 per cent. That range underscores a simple point: India’s expansion is expected to remain strong, but it is no longer insulated from shocks to energy, trade or farm incomes.
The banking numbers themselves are still impressive. Gross non-performing assets have fallen to multi-decade lows, capital buffers are comfortable and profitability remains solid. Yet CareEdge has warned that retail stress, especially in unsecured personal loans and microfinance, could begin to reverse some of those gains. That concern is not abstract: rising debt burdens tend to show up first in segments where borrowers have little collateral and limited room to absorb higher repayments.
The sharper warning lies in the funding mix. In FY26, credit growth outpaced deposit growth, pushing the loan-to-deposit ratio to a decade high, according to the lead article’s figures. The RBI has already tried to ease pressure with foreign currency deposit support, but that only buys time. If banks keep expanding lending faster than their deposit base, they will increasingly lean on wholesale funding, which can squeeze net interest margins and make the system more vulnerable if market conditions tighten.
That is why the next phase for bankers is less about headline loan growth and more about balance-sheet discipline. Deposit mobilisation, especially in smaller towns and rural areas, needs to become a priority. So does tighter monitoring of unsecured retail loans, microfinance and other pockets where stress often appears first. For India’s lenders, the message is clear: strong capital and low bad loans are not enough on their own if the cost of funding keeps rising and savings fail to keep pace with credit demand.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
