Banking business model under challenge if deposit tightness persists: Uday Kotak

Leading Indian banks are offering deposit rates which are higher than home loan rates, resulting in a negative spread and if deposit mobilisation challenges remain, the banking system business model will face a challenge, Kotak Mahindra Bank’s founder Uday Kotak said today.

“Leading banks are taking 1 year wholesale deposits at ~8 per cent. Translates to loaded marginal deposit cost of 9 per cent+ after CRR (0 interest), SLR, deposit insurance, priority sector,” he said.

“Excluding opex. Low cost retail deposits (CASA non wholesale) show muted growth across the system. Yet, banks are issuing home loans at 8.5 per cent floating rate. Borrow at 9 per cent and lend at 8.5! -0.5 per cent spread. And repo rates likely to drop. What about the opex/ credit costs? If the deposit tightness persists it is a challenge to the banking business model” he added.

Rush for higher cost deposits

Banks have been facing a deposit mobilisation challenge, especially in acquiring low-cost current account and savings account (CASA), over the last two-three years.

While customers are parking funds in higher-yielding fixed deposits or other equity market instruments, the efficiencies in corporate- and government-backed companies have led to a fall in banks’ CASA ratio.

Lenders are therefore turning to certificate of deposit (CDs) to raise funds. According to the Reserve Bank of India’s (RBI) latest monthly bulletin, primary market issuances of CDs by banks rose 34 per cent year-on-year (y-o-y) to reach an all-time high of ₹10.58 lakh crore during FY2024-25 (up to March 7, 2025) as against ₹7.89 lakh crore recorded in the year-ago period amid persisting gap in credit and deposit growth.

News agency Reuters reported that India’s IndusInd Bank garnered $2 billion in higher-cost bulk deposits in March, its biggest monthly haul in at least two years, as the lender shored up its funding base after disclosing accounting lapses. It paid 7.90 per cent on its one-year CDs this month, 20 basis points higher than what it had paid for similar deposits in February, the data showed.

HDFC Bank, too, has been raising funds via CDs to lower its credit-deposit ratio which got elevated after the merger of erstwhile Housing Development Finance Corp with HDFC Bank