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Banks: Credit-Deposit issues
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Two events that have occurred recently can potentially influence the Indian banks’ business during 2025-26.
First, on April 2, the Trump Administration unleashed the so-called ‘trade war’ across the world.
Second, many commercial banks have either reduced their deposit rates or annulled their ‘special’ deposit schemes of the previous year, even before April 9 when the RBI’s Monetary Policy Committee is scheduled to announce their decisions on the policy rates. The elevated rates were reportedly compressing the banks’ Net Interest Margin (NIM).
Deposit growth
Deposit growth considerably decelerated during 2024-25, despite interest rates remaining high compared to the preceding years. This led banks to tap the Certificates of Deposit (CDs) as also (infrastructure) bonds markets.
One of the positive factors that would shape the deposit growth trajectory in 2025-26 include rising per capita ‘disposable’ income, consequent upon substantial income tax relief provided in this year’s Budget. Add to this the hikes effected in Dearness Allowance/Dearness Relief for the central government employees/pensioners.
Further, banks are expanding their physical network and amending their mistake of relying on walk-in deposits. Many bank CEOs have started exhorting their staff to mobilise deposits.
There will be some competition from the government’s small savings schemes to bank deposits, as the government has kept interest rates on the former unchanged at least for 2025-26 Q1.
Despite the stock market turbulence, the continuing faith of the middle classes, especially via Systematic Investment Plans (SIPs), would compete with bank deposits. In fact, a large section of the middle class has got used to the current market volatility, which they believe is more due to external factors.
But inflation, if not controlled, would play a role as it erodes not only the savings capacity but also the ‘real’ return from bank deposits.
Among other negative factors, unemployment may worsen as many IT and IT-enabled services have already announced layoffs during 2025-26. ‘Trump tariff’ may also exacerbate the unemployment situation.
According to the RBI’s survey on inward remittances for 2023-24, US emerged as the topmost source of remittances to India. However, consequent upon massive layoffs and other problems in US, remittances may reduce in 2025-26. On the contrary, probably, many parents, whose wards are studying in US but wouldn’t be able to pursue Optional Practical Training or internship during vacations, have to remit money to them. The same would happen if inflation in US worsens.
Banks may have to meet the retail deposit shortfalls from such factors through wholesale deposits like CDs, as observed in 2024-25. While the former is low-cost and stable, the latter isn’t.
Therefore, the RBI may consider removing deposit insurance coverage for CDs as recommended by the RBI Report on Deposit Insurance Reforms (1999), and the premium saved therefrom be given as additional interest to retail depositors.
Thus, we expect deposit growth to increase in 2025-26, albeit modestly.
Credit growth
In general, uncertainties surround the credit demand during 2025-26 due to the global tariff imbroglio. So long as the situation doesn’t stabilise not only between India and US but also between India and other jurisdictions with which India is negotiating Free or Bilateral Trade Agreements, one cannot say which industries will be affected and which not, besides to what extent.
Trade credit, both for exports and imports, will likely be hit.
However, the ‘personal’ loans segment will remain resilient due to increased ‘disposable’ income. The March 2025 revisions in the Priority Sector Loans guidelines by the RBI would increase credit flow to housing and renewable energy sectors.
Despite ascension of gold price, the demand for gold as a safe haven asset would continue, along with gold loans demand.
Demand for educational loans will depend on two opposing factors. Due to the uncertainty in US, the demand for ‘overseas’ educational loans will dampen. However, since these students will now study in India, the demand for ‘domestic’ educational loans will correspondingly rise. Non-performing assets in the educational loans portfolio of banks may aggravate.
We expect loans growth to be modest, and this, in turn, may discourage banks to accelerate their deposit growth, given no systemic liquidity tightness.
The credit-deposit ratio may remain unchanged in 2025-26
The writer is a former senior economist, SBI. Views expressed are personal
Published on April 6, 2025
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